CEO Insights

"Flooring Approach" to Retirement Planning

Many people approaching retirement worry that they will not have enough money to maintain their standard of living once they retire. The retirement landscape has changed in recent years because people are now living longer, and there is a realistic chance of outliving one’s savings.

There was a time when retirement income came from three main sources: pension plans, Social Security, and personal savings. Fewer people have access to, or can reliably count on, either government or corporate pensions, and Social Security has long-term uncertainty around its viability. This means that more people will need to rely on their savings and investments to fund their retirement, and those funds will have to last longer than they have in the past. With low interest rates, and no expectations for them to rise in the future, it is likely that savings will not grow at a rate to sufficiently outpace inflation and cover future income needs.

So how can people ensure that their retirement income meets their basic living requirements? One option is to take the flooring approach to retirement income planning. This strategy involves focusing on secure retirement income, rather than a more volatile, riskier investment portfolio. The investor would work with a financial planner to build in a “floor” of income to cover mandatory annual expenses during their retirement years. They can add riskier securities and investments to their portfolio to cover non-essential expenses.

“When we look at a client’s budget, we’ll divide it between basic necessities and goodies, and then come up with several sources to create a regular monthly income no matter what is happening in the market,” said James J. Puplava, CFP®, president and founder of Financial Sense® Wealth Management. “So, we may combine Social Security, the clients’ pension funds, immediate annuities, and investments in blue chip stocks that pay regular dividends in our clients’ portfolio. This ensures that their basic living needs, such as their mortgage, home expenses, medical care and so on, are covered through various long-term income streams.”

Puplava first became interested in financial planning in the early 1980s, after reading a book on the topic. While he had taken courses on investing, he was inspired that he could help individuals more as a financial planner than as a stockbroker. After apprenticing with an experienced financial planner, he built a career in planning and investment management. In 1996 Puplava established Puplava Financial Services, Inc., now Financial Sense® Advisors, Inc., a registered investment advisory firm and Puplava Securities Inc., now Financial Sense® Securities Inc., a broker/dealer firm that offers full brokerage services. Under the umbrella of Financial Sense Wealth Management, Puplava provides retirement income consulting services to help clients develop strategies to help them meet their retirement income needs.

puplava quoteCommunication with clients has always been key for Puplava and in addition to podcasts, a quarterly newsletter and semi-annual calls, Puplava loves meeting with clients in person. He’s hosted financial seminars for decades and enjoys opportunities where he can help others create secure financial retirement plans.

Taking a flooring approach to retirement planning is different from a traditional retirement strategy, and must also consider different factors. As previously discussed, the main concern is to address strategies that will help clients to pay for the basics of living, such as food, shelter, transportation, and medical care, throughout retirement. Beyond that, the retiree’s investments should keep up with inflation so that they maintain pace with tomorrow’s prices. People will also have wants – which go beyond basic needs – when they retire, so strategies should address clients’ specific goals wherever possible. In some cases, clients want to leave a legacy for those they leave behind, such as helping with medical costs for surviving spouses or leaving gifts for loved ones, so financial planning strategies should help them to achieve these goals as well.

It’s nearly impossible to address all these concerns, and meet clients’ specific needs, with off-the-shelf or proprietary financial products. That’s why Puplava believes in customizing retirement plans for different clients based on their specific needs and situations. As part of the flooring approach, he will collect as much information as possible and get to know clients on a personal level to ensure that he creates a retirement plan that will cover their basic living expenses in retirement, as well as address their specific needs.

“In addition to gathering all relevant data on, and documents from our clients, we will also conduct a risk questionnaire and a health questionnaire,” said Puplava. “This helps us to better determine their specific risk preferences, while also gaining a better understanding of their specific health needs and long-term health prospects. We’ll create different charts for clients of different ages, risk levels, and health care needs to ensure that the strategies we’ve created fit them specifically.”

Retirement is not a static scenario, as people will have varying needs and income requirements at different points in their lives. There are three general stages in a retiree’s life, during which time they will have different income needs. From about 65 to 75 years of age, retirees tend to spend more, as they are relatively active in traveling or engaging in various activities and hobbies. From the ages of 75 to 85, retirees tend to slow down and do less, therefore spending less money than in the previous stage. From the age of 85 and up, retirees tend to incur more medical expenses due to age-related health issues, and require either long-term medical care or assisted living support.

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Since income requirements and expense levels can vary greatly during these different stages of retirement, it’s important to create a retirement plan that considers these issues in advance. Puplava works with clients to ensure that they have sufficient monthly income during these different stages, and that their retirement plans are properly set up to fit their needs at those times. For example, he will include dividend-paying blue chip stocks in their portfolios, which dividends can potentially double every 20 years or so, providing regular income over a long period of time.

“A lot of my clients have insurance policies, and I encourage them to keep those policies even when they’ve paid off debts covered by that insurance,” said Puplava. “This ensures that the surviving spouse has another source of income when the insured spouse passes away. This is important when, for example, a husband has more Social Security in his account than his wife, as she can lose her Social Security when she takes his funds after his death. The death of a spouse can also lead to the loss of regular pension fund payouts, which means fifty percent of pension income will be gone.”

It’s important to work with a registered investment advisor who will act in a fiduciary capacity when putting together a retirement plan for clients. A fiduciary will focus on clients’ needs over getting a commission, and will not sell proprietary commissioned products when putting together a proper financial plan. As a fiduciary, Puplava gets to know his clients’ specific needs and long-term objectives, which includes conducting a risk assessment of both spouses to better understand their specific risk tolerances and needs.

“When looking for a financial planner, make sure that you do your research to understand who you are dealing with, how they are compensated, and what they will do for you to meet your retirement goals,” said Puplava. “Ask about their qualifications and education, their investment philosophy, and experience. Make sure to ask for referrals, particularly from clients who have circumstances that are similar to yours.”

For more information on Financial Sense® Wealth Management, visit: puplava.com

 

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