Thursday, March 18, 2010

Finally, an Income For Life Model That's Real!

The investment media is awash in various income for life scams that guarantee you can invest in their system and never lose another penny. Obviously, such claims fall into the "to good to be true" basket of the investment scam smell test.

But back in November 2, 2009, Kiplinger's offered a real-life investment model for lifelong income. In fact, it's even called the "income for life" model, and it works by tipping traditional investment advice on it's head. Well, actually, on its side.

Here's a comparison :

(compliments of kiplinger/Yahoo! Finance)

[caption id="attachment_642" align="alignleft" width="156" caption="Classic retirement income model."]Classic retirement income model.[/caption]

In the traditional, or classic approach to retirement investing, all of your assets are diversified but they are also all at risk at the same time. Just ask anyone newly retired or about to retire in the fall of 2008. In the traditional model, your retirement funds were nicely diversified across various asset classes and their implied associated risk. But when the market tanked in 2008, it took most asset classes with it: stocks - across the board from small cap to blue chip, bonds, real estate... in fact just about everything except cash and commodities.

[caption id="attachment_643" align="alignleft" width="300" caption="Income For Life model."]Income For Life model.[/caption]

In this new income for life strategy, your income and growth are separated. You get guaranteed income from the immediate cash you have stashed in CDs, savings, annuities and bonds, but you also get growth potential in the amount you have stashed in the riskier investments, to the right of the income for life strategy triangle in the chart above.

How it works.

Instead of the traditional retirement model which recommends taking 4% per year of your savings as your income, the income for life model has the retiree taking his income from the Fixed segment of the sidelong pyramid. As the savings in the fixed portion runs down, it is replenished with money from the growth portion on the right - the money in the retirement fund is moved from the right to the left over time. If the fixed portion has grown so that no money transfer from the growth portion is required to replenish it, then the growth portion is free to continue growing.

Why I like it.

Although it really just seems like a different way of looking at the same old situation (i.e. generating income from your retirement savings), I think it's an important shift in the way we view retirement income. Too many people view retirement as the end of the road for their retirement savings. They have this idea in their heads that what they have when they retire is all that they will have for the rest of retirement. But that simply isn't true.

The sideways pyramid makes people realize that you need some portion of your savings allocated to growth. After all, it's not unheard of for people to living 20-30 years in retirement and most people simply cannot amass the savings retired to live off of for 20 years or more without some growth to keep ahead of inflation.


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