The unloved retirement planning

At its core, retirement planning is simple. You trade income during your working years for income during your non-working years. To do this, you set aside a portion of today's income and accumulate enough so you can live off of it in retirement.

Thus, you find ways to grow the money you set aside and hope that the amount you saved and invested over time will grow to be enough to last through your lifetime. Naturally, you focus on tools and techniques that will help your money grow, like investing in marketable securities, buying real estate, creating an income stream, and so on.

So far so good.

But, while you're focused on offense (saving and growing your money), are you neglecting defense (managing risks)?

Many of us can remember those euphoric moments watching a home run ball fly out of a ball park or a beautiful 50-yard pass for a touchdown. But brilliant defensive plays? Not so much. Offense is a lot more glamorous, even titillating. But to win consistently, a team needs balance. Both the offense and the defense have to work together effectively in tandem.

That's because the end goal of a sports team is not to score as many points as possible at all costs, but to win games. Similarly, your end retirement goal is not to maximize your investment returns at all costs, but to win the "retirement game."

So, what does it mean to win the retirement game? Simply put, it means having smooth lifetime income, not only during your working years but all throughout your life, including your retirement years. To accomplish this, you must be smart about playing both offense and defense effectively – take sensible risks to grow your money, but also manage risks.

So, what does it take to manage risks? How exactly do you play defense? What must you do to build a backstop so your plan doesn't derail?

Let's put it this way. Whether or not you'll achieve your goals and dreams is predicated largely on one thing: your ability to earn income. Even if you have nothing in your bank account today, you can still consider yourself rich. Why? Because, financially speaking, your future earning potential is enormously valuable (aka worth a ton of money). If you add up all the income you will earn throughout your career, wouldn't it add up to be a significant sum?

As such, your most valuable asset is you, and more specifically, your ability to earn income. Academics call this "human capital" and it would be in your best interest to protect it. Let that sink in for a moment. (We've alluded to this concept in our previous post.) 

Think about it. If you die too soon, your family loses enjoyment of their current lifestyle your income has provided right up to that point. The impact is instantaneous, complete, and permanent. Or, if you become too sick to work, you lose your ability to earn income. This, too, will profoundly affect your (and your family's) lifestyle. And if you live too long, you might outlive your money – not to mention the increased probability of being burdened with long-term care costs as you get older. As your assets get eroded from longevity and unexpected medical costs (e.g. long-term care costs), your retirement income will suffer and may even never recover to last through retirement.

Whatever the case, the outcome is the same. It results in you becoming unable to follow through on your plan to reach your goals. It's really that simple. No income, no plan. And this is true whether you are a corporate employee or a business owner. You want your income to continue no matter what happens.  

Fortunately, you can mitigate a lot of these risks by shifting them to an insurance company. By definition, they are in the business to assume such risks and absorb losses for you in exchange for premiums they receive.

Insurance may seem boring and may force you to contemplate unpleasant things like your mortality, disability, or losing independence in old age. But if these unpleasant things do happen, they can bring about catastrophic financial consequences to you and your family. Look at this way. Insurance is simply a tool to sensibly and cost-effectively manage your risks so you can give yourself the best chance to win the retirement game.

Insurance premiums aren't costly, but losing the retirement game is.

We do not provide legal or tax advice. You should consult their own legal or tax advisor. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.