Legs: How stable is your financial plan?

When talking with clients about finances, and retirement planning in particular, I often use an analogy using legs.

A 3-legged stool is fairly stable and can stand on its own fairly well.  A 4-legged object (think table) is very stable and can often keep standing even after one of the legs has been damaged or removed.

It is sometimes helpful to think of your finances in the same way.  Do you have a stool, a table, or something much less secure?

For most people, Social Security serves as one leg.  A second leg is the investment portfolio (retirement plans, personal investment accounts, etc.).   In the past, the third leg was usually a pension.

The combination of two guaranteed, inflation protected income sources (the pension and Social Security), along with a supplemental savings or investment account, was enough for most older Americans to enter retirement with a sense of security about their income.

Today, pensions are rare and people are dependent on their investment portfolio to see them through their golden years.

The problem with using an investment portfolio as the primary source of retirement income is that it isn’t always a very stable leg.  Investment results, and income, are largely out of our control.  Being diversified and having an appropriate mix of stocks bonds can help to reduce portfolio risk but cannot guarantee a level of return (income).  And there is no insurance against portfolio losses during a market downturn.

So what do people do today to add a third or fourth leg to their finances?   In my work with clients, we explore options such as a investing in a business or rental property to help provide income.  For others, we weigh whether it might make sense to purchase an immediate annuity in retirement.  Immediate annuities are similar to pensions in that they can provide a guaranteed source of income for life.

There are advantages and disadvantages to each of these options and it is important to carefully weigh each in light of your individual circumstances.  In the end, though, adding ensuring that your base has three or four legs can help to provide additional stability and inflation protection to help see you through retirement.

Contact me with questions about your financial plan.