What is an Income Folio?
As the markets fluctuate, your peace of mind won’t. An Income Folio gives you the freedom that only security can provide. It provides the freedom to take all those dreams for your future and make them your present.
An income folio is a guaranteed income distribution plan for your wealth when you are no longer working. It is not the same as the accumulation plans you used to build your savings, and works very differently. It’s kind of like the difference between a sure thing and a maybe. It is not about the size of your pile of money, it is about what the money can provide.
Why an Income Folio?
The plan that gets you to retirement is unlikely the plan that will get you through retirement. That’s because instead of saving and investing money, you are now withdrawing and spending it. And that puts a whole different set of pressure and stress on your nest egg. There are two stages of retirement planning and they’re they are distinctively different. You need to understand them.
You stash your cash when you are working
When you’re working, you:
- Are making a salary.
- Are investing money regularly in your 401K or other qualified plan.
- Can accept losses and volatility.
You are accumulating wealth because you don’t need the income because you have a paycheck. You are younger and time is on your side. During this stage in your life, you should be more aggressive, and you can take greater risks. If you lose money, you have time to recover.
But then you need to change up the game
Within three to five years of retirement, and in retirement, we believe you have to go to asset preservation, what we call income distribution. All of a sudden when you do retire, you’re not making a salary, you’re not making your monthly contributions into your retirement plan. You desire maximum security with the assets that took you 30 to 40 years to grow.
You need income, not losses
You must minimize the potential for loss at this point in your life, and you must understand how to create a secure lifetime income. You are going to need to replace your paycheck with income from your retirement savings and make it last as long as you do. If you make a financial mistake, it is very, very difficult to recover.
The market can and does get ugly
If you have a market downturn, like the tech bubble in 2000, 2001, and 2002, lost 53% and if you took out 4% each of the three years or 12%, you’re down 65% (53% + 12%) That would be difficult to recover from. The same thing happened in 2007, 2008 and 2009. If you retired during that time frame, you had the same problem.
It’s Unpredictable
You have to understand that markets will always be volatile and they’re always going to be unpredictable. And when you’re younger and Accumulating assets, you can take that risk because if you lose half your money at age 50, it’s a bummer, but you still have years to work and recover. You lose half your money at 60 or 65 or 70, you have a real big problem. The strategies that you use, the assets that you select, and the planning techniques between the accumulating assets and income distribution are polar opposites. We specialize in asset preservation and income distribution.
If you are five years before retirement or currently retired, you might be a little disappointed because your broker has not transitioned you into a distribution plan by now. You may recognize this is a problem because you have no guarantees in retirement.
Your current advisor
Most advisors are lovely people and are really good at specializing in stage 1, the accumulation of wealth (See Chart). They talk about big returns. They might minimize discussion about the potential risks. They talk about riding out the markets. They talk about hanging in there, saying things like, “Don’t worry about the risk. Everything will eventually come back. Always has, always will”.
And that’s because
The Wall Street propaganda tells us:
- You always have to stay in the market.
- Stay the course.
- It’s going to come back at some point in time.
- Don’t get out.
Many people believe this, and there is nothing wrong with that while you are younger and working. But when you are not working, if you stay the course and the markets are going down, and you’re pulling income out at the same time, you’re about to go on vacation and really enjoy yourself; how enjoyable is that going to be when you know you’re losing money and taking money out at the same time? How much stress will you feel?
As a retired person, you need to know that your income is never going to run out and that you’re not taking risks that you don’t understand. You need to control the risk in a portion of your portfolio to have a guaranteed lifetime income plan. So that’s why we stress these two different stages of Retirement planning. And there are very few companies that specialize in Stage 2 like we do.(See Chart)
We Work With You
With your help, we aim to create a written plan to ensure that you meet and exceed your budget for as long as you live. That way, you can do what makes you happy. If you do not have enough income to cover or exceed your budget, you may find yourself unable to do what makes you happy.
It’s about Controlling your Assets
We start with something simple. We call it controlling your assets and making them work the way you want. Most people don’t think they can make their assets work the way they want. Many people believe they just have to hang in there, ride it out, and hopefully, everything will be ok. But you can control your assets by using three buckets.
Your Liquid Bucket (color Yellow)
The first Bucket is what we call the Liquid Bucket, your liquid assets. This Bucket has:
- Low risk.
- Low volatility.
- Lump sum access.
But liquidity has a price:
- Low return.
- Low income.
Most people love that there is low risk, no fees, and you can grab all your money in a lump sum. But most people hate the idea of not earning much interest on the funds in this Bucket. Liquid money includes:
- Bank money.
- Savings accounts.
- Certificates of Deposit (CDs).
- Money Markets.
- T-bills.
- Money stuffed in a mattress or buried in a mayonnaise jar in the backyard.
You should have liquidity
You need liquidity. Things come up. Emergencies happen. This is money you are going to manage, not us. But, it is important to define it.
How much liquidity do you need?
Liquidity is a personal choice, and there is no single answer. Popular choices include:
- Somewhere between 6 to 12 months of income.
- A flat amount of $50,000 or more.
Too much money in liquidity has caused people to go broke safely during periods of low interest rates
The challenge is that you have been told that you always need to get the highest return on your assets for a successful retirement. That’s not true. Some of your assets need to be kept liquid. Liquid funds are not going to earn a very high rate of return. In this case, it is not about the return, it is about safety and liquidity.
Your Risk Bucket
So, instead of having a lot of money in liquid assets, many people listen to their advisor, who will recommend that they have growth assets. The advisor consistently tells you that you need to earn a good return on all your assets. Eventually, then you start feeling that way. Well, that’s not true. You don’t need to earn a good rate of return on all your assets. Typically, you are not going to be told or reminded that you have potential high volatility, and in many cases, you’re not told you have the potential for partial or even full principal loss.
This Bucket includes things like:
- Stocks, bonds, options, exchange-traded funds, and mutual funds.
- Variable annuities.
- Real estate businesses.
- Precious metals.
- Oil and gas.
All these things have good return potential. Still, they also have a high level of volatility and a high potential for partial or full principal loss. In other words, you could lose some or all of your money.
The risk you take is up to you
Many people prefer having some money at risk as part of a retirement strategy to help offset future inflation. We are not a brokerage firm or a Registered Investment Advisor. This risk bucket is money you are going to manage or have managed but not by us.
Your Third Alternative – What We Can Do For You
Often, your brokers and advisors will not tell you about your third alternative. The third alternative is a Bucket between liquidity and risk (also known as the middle column, the middle box, and the middle Bucket). This third alternative is for your guaranteed lifetime income or Income Folio.
This is where your principal is protected 100% against all stock market losses, even if the stock market drops 50 or 60%, you don’t lose anything. It is:
- Safe money.
- Longer term.
- Not as liquid.
- No load.
- Low fee.
And it can come with potential income increases.
You’re going to have a growth opportunity without ever having to suffer loss, and it’ll be a moderate growth opportunity. It won’t be the maximum aggressive growth opportunity, but just moderate, and it’s going to be the thing that’s going to provide you guaranteed income for as long as you live your lifetime income as a single person or if you’re married as a married couple.
It is almost like having more Social Security or a pension
A guaranteed lifetime income bucket gives you principal protection and income guaranteed for as long as you live. The green Bucket would be one of the three buckets we will include in your plan. Our job is to help you figure out how much goes into this Bucket so that you have ample income to live a stress-free and worry-free retirement, regardless of what happens on Wall Street.
(PICTURE OF ALL THREE BUCKETS HERE)
You can now decide how to allocate your assets into each of these three buckets, and by doing so, you can make your money behave however you want.
You decide how much money you want to put in your gold bucket and how much money you want in liquid cash. You should not expect money in the liquid Bucket to give you a high level of income, a high rate of return, or be risky. You should expect it to have no risk, be available, be completely liquid, and not have any fees.
If we put some money into the Green Bucket, the principal protection and guaranteed lifetime income bucket, we don’t expect it to be completely liquid like the bank money. Instead, this is the money that provides you that principal protection and a high level of income, guaranteed for as long as you live. It’s not meant to provide you with the highest rate of return potential like the stock market, but you are also not ever going to suffer one penny of principal loss because the market goes down.
If you have money in the red Bucket, you know it’s not free of principal loss. You have risk. You could lose principal there, but in many cases, it could be liquid. However, it’s probably not going to give you a high level of income guaranteed for as long as you live.
So, if you understand how all three of these buckets work, you can now make your money act any way you want because you know how the gold bucket is going to work, you know how the green bucket is going to work, and you know how the red bucket is going to work.
Most people need to learn how to properly allocate their assets and divide the right amount into each Bucket when they retire. It’s difficult for them, so they leave their Buckets the way they had before, which could mean taking significantly more risk than they should.
If you’d like to learn how to position your assets and allocate them using these three buckets, simply send us an email at info@incomefolios.com mentioning “buckets” in the Subject line or message. We can meet you over the Internet, by phone, at your home, or in our office. We’ll help you learn how to allocate your assets to meet your goals.
So let’s say now you say, gosh, I love those three buckets. I love that approach. How do I do it? Well, you now have to put priorities on each one of the buckets.
- The number one priority will be how much income do you need for the rest of your life. The priority #1 isn’t on growth anymore because you’re older and can’t take as much risk as you did before. It’s how much income you need for the rest of your life.
- The second priority is how much liquidity do you need.
- The third priority is how much growth do you want.
Now, when you do your plan in this order, you will significantly increase the probability of retirement success. Retirement success isn’t massive growth in your assets. It is ensuring you never suffer a significant loss and making sure your income runs smoothly for as long as you live. Would you consider that retirement success? Most people do.
When you work with us, we will craft a comprehensive retirement income plan together. Everyone we choose to work with receives a copy of their budget and a net worth statement. Using our Retire Now software, you will have a clear understanding of your income plan and how it works. If you become a client, we will give you a copy of your Income for Life report, your budget, your personalized written plan, and all plan documents organized in our Personal Financial Inventory Binder.
Conclusion:
Life is unpredictable, and there are a number of events that can impact our finances from global pandemics to a personal crisis. But no matter what’s going on in the world, you want to make sure you can retire when you want and how you want.
An income folio is a structured income plan that can provide income stability and predictability, even in volatile markets. Retirement is about having an income you cannot outlive. With a thorough understanding of how your plan was drafted to meet your goals, you can retire in confidence with protected regular income, regardless of what is happening on Wall Street.
The first step is to take stock of what you have and what you need. If you would like a complimentary review of your financial situation, e-mail us at info@incomefolios.com.