Last week’s post, Where Have All the Pensions Gone? made the point that given (a) the scarcity of traditional defined benefit pension plans, (b) the inability of 401(k) plans, employee and self-employed retirement plans, and many nonretirement investment vehicles to provide for a predetermined monthly lifetime income beginning at a specified age, and (c) the inadequacy and uncertainty of the Social Security system, it behooves each and every one of us to create our own pension plan.
With this week’s post, I want to expand upon and clarify the conclusion in last week’s post. I understated the point when I said that it behooves each and every one of us to create our own pension plan. It isn’t simply beneficial or worthwhile to create our own pension plan – it’s imperative that we do so. To do otherwise is to leave our retirement exposed to too many variables beyond our control and, in turn, risk that we will outlive our retirement assets.
Outliving one’s retirement assets can happen in any number of ways, including, but not limited to, experiencing one or more of the following eight retirement roadblocks:
- Insufficient investment assets to sustain a longer- than-average life expectancy
- Prolonged higher-than-average inflation
- Sequence of returns with bad early years. See the October 5, 2009 post, The Sequence of Returns – The Roulette Wheel of Retirement.
- Withdrawal drag. See the September 28, 2009 post, Withdrawal Drag – The Silent Killer.
- Excessive investment withdrawals relative to available retirement assets
- Uninsured events, e.g., long-term care
- Unfavorable income tax law changes
- Poor investment management
As you can see, too many things can happen, many of which are beyond our control, that can prematurely deplete one’s investment assets. Although unplanned, the occurrence of one or more of these events could easily derail what’s suppose to be our golden years.
Something we have the ability to control, and, furthermore, as previously stated, is imperative for us to do, is creation of our own pension plan. Specifically, we need to replace employment income with a retirement paycheck.
The risk that we will outlive our retirement assets is shared by individuals of all means. A sizeable nest egg, while it can sustain one through many years of retirement, can also be depleted before the end of one’s and one’s spouses, if married, lifetime(s) in the absence of a sound retirement income plan.
Although a retirement paycheck doesn’t guarantee that we won’t outlive our retirement assets, it will eliminate our exposure to several of the eight retirement roadblocks, and, in turn, improve our odds for success.