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Retiring reliably, leaving a legacy or balancing both?

In fall 2010, I posted a blog on the subject of retirement planning: “Is it you … or the kids?” It’s been helpful ever since, so I thought I’d revisit that post, and freshen it up with additional ideas.

At the time, I noted how traditional defined benefit (DB) pension plans – and their guaranteed, inflation-adjusted income for life – were becoming increasingly rare, especially in the private sector. The continued demise of DB plans is not all bad news. As nice as they were, they meant that your employer was calling many of your financial planning shots – for better or for worse.

When you are more directly in charge of your retirement assets, you get to prioritize your saving, investing and spending habits – in retirement and for your life’s greater goals. As you approach retirement and you prepare to shift from saving and accumulating into spending your wealth, you end up making a highly personal choice between two important, but often conflicting goals:

Do you want to leave a substantial financial legacy? At one end of the spectrum, you can choose to have a greater financial legacy to pass on to your children or charity.

Do you want to live reliably in retirement? At the other end, you may prefer to ensure retirement income sustainability for as long as you live – similar to the kind of stability a traditional DB pension plan provided.

Bottom line, you get to weight the decision one way or the other. As we surmised in our earlier post, this basically means deciding: Is your remaining wealth more for you or the kids?

Different priorities call for different strategies

Financial Legacy Planning – If you want to emphasize leaving a legacy, it stands to reason that your portfolio’s average expected return should exceed your withdrawal rate, so inflation doesn’t eat away at the balance. This usually means keeping more of your investments working in the markets, while also arranging for a way to take out cash on a regular basis. While this kind of strategy offers you better odds for leaving a bigger financial legacy, it does not guarantee success. Higher expected returns almost always entail higher risks.

Retirement Sustainability – For emphasizing retirement income sustainability, you’ll want to look into a strategy that offers more dependable outcomes … which also translates to lower expected returns. As I described in my earlier post, Dr. Moshe Milevsky and Alexandra MacQueen have co-authored a book entitled Pensionize Your Nest Egg, which describes a strategy for creating your own personal pension-plan-like stream of monthly income. I’m also available for a conversation if I can help you think through your retirement planning.

When should you plan for your “you or your kids” strategy?

There’s never a bad time to think about your financial future, but there are a couple of key times for considering what you’d like to achieve in retirement. The most obvious is the “retirement risk zone,” 5–7 years in advance of your retirement. It’s also worth visiting when you are much younger. If you know in advance that you’d like to build pension-like strategies for retirement, the economics of implementing them in your relative youth can be very attractive.

Again, when shooting for a greater financial legacy or higher income sustainability, remember that there are trade-offs either way. To shoot for greater wealth entails more risk. To keep your money safer implies lower returns. Different factors – such as personal preference, risk tolerance and legacy goals – play a part in which balance makes the most sense for you.

So, is it you or the kids? Ultimately, it’s really one or the other.