Retirement freedom is a great goal to achieve in your golden years. However, retirement freedom is a term that can have many different meanings and used in a number of different ways. I like to define retirement freedom as "having the freedom from doing that which you dislike, while also having the freedom and resolve to purse your best life, at your own discretion." Or said more simply, doing what you like, when you like, with whomever you'd like to do it with. And not having to sacrifice that ability to lesser priorities. A common example of this is someone who decides to work in retirement, but not because they are financially required too. They do it as compliment to their retirement and not as a prerequisite. So retirement freedom is the ultimate goal for most. So how do you get there? Although there is no one way to proceed in this direction, I have found that their are 5 important assets that can help immensely in making retirement freedom a reality. In this blog I plan to outline these 5 assets and explain how and why they are key to achieving true retirement freedom.
Why a War Chest of assets is so important
How Long-Term Care assets can bring peace of mind to any retiree family
Guaranteed Income Streams can be used to match basic living expenses
Tax free assets help keep the IRS off your back
Legacy assets will help create impact beyond yourself
War Chest Assets
A war chest of assets is a colloquial term that is used to describe safe and secure money that has been set aside in case of emergency or unexpected opportunity. When you are younger or in the accumulation phase of life, this type of asset is better known as an emergency fund. However, as you enter into retirement, I like to replace the term emergency fund with war chest. Essentially your war chest assets will be used as a buffer against adverse events that happen in retirement.
Most commonly, these war chest assets become very valuable when retirees are experiencing large negative returns in their investment portfolios. Due to sequence of return risk, it can become a big issue for retirees when they are forced to spend down on their retirement nest egg while those same retirement investments are losing money during poor investment performance periods. How do you make money in the stock market? Buy low and sell high. But when you are forced to continuously sell your investments in retirement (you still have to pay yourself in retirement, regardless of how investment markets are performing) when those investments are losing in value, you are essentially locking in those losses. Or selling low. And when the investment markets rebound in the future, you will be left with less money in your investment account that will appreciative in value during a recovery.
A war chest of assets gives you the ability to tap into this money during poor investment return periods. When you have a properly funded war chest, you now have a better resource to use to fund your retirement instead of selling those other retirement investments at a loss.
A war chest can also provide a behavior anchor. Many times retiree's get spoked when investment markets take a big down turn. And rightfully so. It can be scary watching the value of your future retirement resources drop like a rock. However, having a war chest of assets available to you that are not at risk like the rest of your money may allow you to sleep better at night knowing you have money available if you need it, that is safe and sound. And hopefully that money is enough to cover multiple years of retirement expenses.
Long-Term Care Assets
First, I want to point out that Long-Term Care Assets is not a fancy way of describing Long-Term Care insurance. Although LTC insurance can be consider an LTC asset, those two are not one of the same. LTC assets are a pool of assets that have been set aside or earmarked for a potential future LTC expense. Everyone knows that long-term care is expensive. You've probably either seen it first hand or heard how long-term care can completely deflate the financial vitality of an induvial or household. Many legacy goals have completely vanished due to the rising cost of long-term care.
This is why its critical to have some sort of long-term care asset available, if this situation presents itself. Also, having this area of your life planned for makes a big difference in whether you're able to achieve true retirement freedom or not. Many people decide this is not an area of need. They often tell themselves that if this becomes a problem in the future, we will deal with it then. And that is their decision. But it's not one I would recommend.
Letting yourself be exposed to future long-term care costs without a plan in place is dangerous. It leaves all of your other assets at risk. All of the items in life that you value and want to pass on to a future generation are literally in the cross hairs of long-term care expenses. Knowing this, you can't possible live a life of retirement freedom while also being exposed to this future threat. So to combat this, you need assets available to deploy.
Like I mentioned before, long-term care insurance could be an option. However, there are many other ways to prepare. You could carve off a piece of your retirement nest egg at a young(er) age (50's or early 60's) and specifically ear mark that money for future long term care expenses. Just think, at age 55, you could take $75,000 of your retirement portfolio and invest that money exclusively for long-term care. Let's assume you invest it aggressively and don't plan to use that money for 30 years. If we can average an 8% rate of return over a 30 year period, that $75,000 would grow too approx. $754,699. In 30 year's lets assume that it cost $150,000/ year to live in a one bedroom, private care facility. Your $75,000 LTC asset today, could provide you with over 5 years worth of LTC coverage, 30 years from now at a cost of $150,000/year. Better yet, if you don't eventually need this money for LTC in the future, it's available to you for any other expenses that take priority at that time. Or it can be added to your legacy assets (more to come below) to be passed on to beneficiaries when you pass.
Now let's also assume that when your age 55, you already have $2,000,000 of net worth. Taking $75,000 and earmarking it for future long-term care expenses is essentially using 3.75% of your net worth today to protect the other 96.25% in the future. That sounds like a prudent financial move to me.
You can also look at other assets you currently own that could be used for future long-term care expenses. A great example could be the equity in your home. If you are forced to move into a long-term care facility, you will have no use for your primary residence (unless your spouse remains there. But even then, you could tap into the equity.), which makes it a good spot to draw cash from in case of a long-term care need.
So there are many ways to fund future long-term care expenses. But it's important you have your LTC assets in place and ready to go for that potential future event, regardless of what strategy you use.
Guaranteed Income Assets
A guaranteed income asset is an asset that provides you with an income floor. No matter what happens in the investment markets or in our economy, this money can be counted on every single month/year to provide you with a steady income stream. Like the section above, this is not a ploy or a push for you to buy any sort of investment or annuity product. Instead it's merely to highlight the benefits of having a guaranteed income asset available as we pursue retirement freedom.
To start, lets name a few options that could be used as guarantee income assets.
A pension is starting to become less and less common. If you are lucky enough to have one, congratulations! A pension is a stream of income that, if chosen, will provide you with steady and stable income for the rest of your life. You don't have to take on any investment risk, but instead get to enjoy the benefits of a steam of payouts for the remainder of your life.
Income annuities are essentially the exchange of your money to a Life Insurance company in return for a steam of payments for the remainder of your life. The stream of payments could also be over a specific period of time as well. You get to decide. Just like the pension payment, you can confidently rely on this money getting paid to you regardless of outside circumstance.
Interest earned and paid to you can be a source of reliable income. An example of this could be interest from a bond. The value of that bond will fluctuate, but the interest paid (in most circumstances) should be a reliable stream of income. The downside here is that interest isn't as "safe" as income annuities or pensions in my opinion. It's also extremely hard to find fixed interest paying investments that are paying a high enough rate to make it worth it.
The real benefit of having guaranteed income assets(s), is when you can match those guaranteed streams of income to specific retirement expenses. When a retiree can be guaranteed that their basic living expenses will be met with a stream of income that will match those expenses, it can provide a tremendous amount of confidence and relief. Confidence and self assurance is a key factor in retirement freedom.
Tax Free Assets
Everyone loves paying more in tax than they are otherwise required too, right? Just like all pharmacists love PBMs. Ok, so we know both of those are false. Luckily, with the tax piece (keep fighting the good fight against PBMs) we have available remedies. And the most common remedy is tax diversification of assets. Being able to pick and chose where you pull your money from, during different tax environments throughout retirement, is very beneficial in pursuit of true retirement freedom.
By definition, which we covered above, retirement freedom is being able to do what you want, when you want, with whomever you want. Well, taxes can play a big role in sabotaging that for people. We can't control tax rates. They go up and they go down. What we pay from a rate standpoint is out of our control. However, we can control which accounts we invest in that directly correlate or contrast to our tax environment.
The best example of this is traditional IRAs and Roth IRAs. A traditional IRA will require you to pay tax on that money whenever you withdraw it from the account. If rates are higher, you'll pay more in tax. If rates are lower, you'll pay less in tax. It's completely dependent on current tax rates. And since we already know that we can't control those rates, it puts us at the mercy of policy makers in Washington. Not ideal for retirement freedom.
On the other hand is the Roth IRA. The money you pull out of a Roth IRA (if all requirements are met) is tax free. So it doesn't matter where rates sit currently. You now have control to use that money and not be beholden to IRS tax rates. Being in control of your tax situation every year is paramount. Being tax efficient could be the difference in tens of thousands or even hundreds of thousands of dollars in retirement savings.
There is more good news in this regard as well. A Roth IRA isn't the only tax free investment you could take advantage of. Don't forget that the bottom bracket of the capital gains tax brackets is currently at 0%. Meaning that even assets that don't sit inside a Roth IRA account could be used tax free.
As people age in retirement, it's common for their priorities to change. As life slows down many people start concentrating on their legacy more. It becomes less about what their money can do for them and more about how it can make a positive impact on other people when they pass. And planning for can greatly increase ones overall happiness and contentment in retirement. Especially as they age.
Legacy assets are a way of bringing your benevolent wishes to the forefront. These assets usually have no material positive affect on your life but instead are positioned to make a massive positive impact in someone else life. These assets can also come in many different forms.
Like LTC assets, you could carve our a portion of your nest egg that you want to pass along to others when you die. This can be done by updating beneficiaries or creating legal documents, like a will or trust, to carry out your intents after you pass. Another unique legacy asset that can carry a huge positive impact if life insurance.
Life insurance is usually purchased earlier in life when you have a lot of risks (mortgage, kids, expenses, etc.) you want to protect your family against. As you age and your net worth grows, your need for life insurance usually decreases. This is true unless you have big legacy goals. If that is the case, there is no other vehicle in the world that can deliver an outsized monetary outcome to your beneficiaries more than life insurance can. It's also tax free!
It doesn't matter how you structure your legacy assets when it comes to maximizing retirement freedom. It only matters that whatever vehicle you do use is in place and ready to go. Knowing this will bring a feeling of comfort and security that becomes the cherry on top of the retirement freedom sundae.
Retirement is a phenomenal accomplish. But I would challenge you to purse more. Don't just get to retirement, but instead live your best life in retirement. And achieving true retirement freedom is the foundation you need in order to make that a reality. Use these 5 assets as building blocks on your way to maximizing the success of your golden years. I wish you decades filled with comfort, confidence, and peace of mind! Good luck!