The Durability of Retirement Income is Critical
The term durable, as it pertains to retirement income, implies that you can’t outlive the income, and neither can the market take away, or erode the income. Examples of durable income would include Social Security, or pension income. For the income to be durable, the source must offer guarantees upon which the investor can rely for the production of that income. In contrast, non durable income would simply be the amount that we hope to sustain from a non guaranteed source, over time. We hope that the performance of the underlying source is consistent enough to support a systematic income over time, but we have no guarantees of that income being durable.
As we’ve discussed within earlier commentaries, everything that we do for clients is driven by the results of extensive planning. As part of the planning process, we carefully examine the nature of expenditures that we can anticipate during retirement. For example, most will have health insurance premiums, expenditures for utilities, groceries, prescriptions, gasoline and car maintenance, and possibly a mortgage payment. These are examples of what I call required expenses. A client must have, at a bare minimum, enough income to cover these required expenditures. To the degree that we have such, we need to meet them with durable income.
Variable expenses would include travel and leisure, gifts, and other such non essential expenditures. We want to have enough income to cover these, but if the source of that income suffers a protracted or severe decline in value, then we have the option of reducing or interrupting that income until conditions normalize. This is an example of variable, non durable income.
For the durable income needs, we often employ tools that offer guarantees of income, while allowing clients to remain invested with a managed approach to risk. Other tools may offer guarantees of principal as well as income, but the driving motivation is removing risk from the production of the income that must be durable. Beyond that, we often employ other tools that focus more on the growth of principal within defined parameters of risk, from which we can take variable income as needed, but without inherent guarantees. Ultimately, we’re left with a mix of assets and platforms that efficiently addresses the holistic income needs of clients.
Again, there is no one size fits all answer when it comes to retirement planning and income production. Each client and plan is unique, and a function of their input. Traditional approaches to income generation may not be as appealing today given the current inflation and interest rate environment. To that end, I would encourage anyone to give us a call for a review of your plan, relative to your objectives, to see if you’re approaching the generation of income efficiently.