Columnists

What’s More Important: Income or Investments?

Issue 48.15

In the financial industry, there are dozens of unwritten rules, or rules of thumb. For example: The “4% Rule” means that you should be able to live off your retirement income if you take 4% each year.

What’s wrong with this “rule”? Over the previous decade, from 2000-2009 most people with money invested in the S&P500 lost money. When that’s the case, taking 4% each year reduces your retirement income. You either need to take more to match your lifestyle, which means your money could run out, or you need to take less to build up your investment, which could mean your financial situation becomes a little tighter than you’d hoped. This situation only addressed INVESTMENT PLANNING.

People too often put their focus on investment planning when they should be focused on income planning. A new client came to me after losing 50% of their investments (from $800,000 to $400,000). As you can imagine, their retirement income had been significantly reduced. They had believed in another one of those unwritten rules – “when you stay in the market long-term, you’ll come out ahead.” However, this rule generally only applies to people investing for growth. As you near retirement, you need to focus more on protecting your investments than building them.

The new “rule” is to focus on INCOME PLANNING first, then investment planning. Take the time to prepare a budget based on your Social Security, pension(s) if available, and retirement savings. Compare that to the income you’ll need in retirement and make up the difference using safe/secure investments. Once you’ve established that base income, you won’t have to worry about what happens in the market because your needed retirement income will always be there.

Using special software, our team at Eric Scott Financial can help you build a clear, solid foundation for your retirement. Call our office at (435)773-9444 to schedule a time to visit with us.

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