I have always liked the metaphor of building a house for the process of planning for retirement.
We would never think of constructing something as complicated and expensive as a home without first drafting a blueprint. The blueprint envisions every detail of the home in advance of construction. The blueprint allows for modifications instead of expensive change orders. It also allows the expertise of an architect in working with the potential homeowner and builder.
It should really be no different in constructing a dream retirement. All important retirement outcomes should be envisioned before hand and a concrete plan put in place of how the construction will go about to make the blueprint a reality.
What is interesting about the construction process once the blueprint has been completed is that the tools used in the construction are driven by and dictated by the blueprint and the ultimate function and purpose of that portion of the home being constructed. Builders don’t use tools just because they prefer them. Builders don’t use certain tools over others because they are cheaper. Builders don’t utilize specific tools over others because they were convinced by the salesman at the store. A builder uses each and every tool only because it specifically accomplishes the outcome and function desired.
And so in retirement planning it should be the same. The financial tools available for the construction of the dream retirement should only be utilized because they accomplish the priority and function intended.
In essence they’re really only are three types of tools we can use In the toolbox of investment asset options.
In the top drawer of the toolbox are the safety tools. These include instruments such as CDs, money market accounts, checking, savings, and fixed annuities. If the function of the goal requires protection, safety tools are the best item to grab. As with all tools they can’t accomplish everything and so there are some trade-offs. Safety tools don’t grow much. It doesn’t mean that it’s a bad tool, it’s just the way things work in the tool world.
In the bottom drawer of the toolbox are the risk tools. These include instruments such as stocks, bonds, mutual funds, real estate, commodities, and variable annuities. If the function of your goal requires growth then there’s no better tool than these. No tool can do everything, of course. And so risk tools have the trade-off of not being protected from loss.
In the middle drawer are the hybrid tools. Hybrid tools have some characteristics of safety and some characteristics of risk. An example of a hybrid tool would be a fixed indexed annuity with an income rider. The money put into the strategy cannot lose money due to market performance (characteristic of the safety tools), and can participate in a portion of the growth of the markets (characteristic of the risk tools), and finally can provide a guaranteed lifetime income that you can’t outlive (characteristic of the safety tools). No tool is perfect, though. This type of tool does not have as much liquidity as most safety tools do and does not participate in as much growth as most risk tools do.
Every financial tool has a primary use that only it can best accomplish. The same financial tool also has limitations and drawbacks. The key to using each financial tool in the arsenal of building your retirement blueprint is to recognize the true goal you’re trying to accomplish and match it with the appropriate tool that’s available.
If you have any questions please feel free to contact me.