Retirement Planning: A Single Point of Failure

A single point of failure is defined as “a potential risk posed by a flaw in the decision, implementation or configuration of a circuit or system in which one fault or malfunction causes an entire system to stop operating.”

In relation to retirement planning, the goal is to minimize the possible effects of a single point of failure (SPOF) by addressing the various expenses, yield and risks of the ideal mix of income producing assets.

A potential SPOF for many retired Americans is the Social Security (SS) system. Today, for more than half of elderly beneficiaries, SS provides the majority of their income.

An interruption in funding for these SS recipients would cause their entire “personal financial system” to stop operating, a social and personal disaster. Although not entirely without risk, we consider the possibility of interruption of SS funding to be remote.

What about other tools and products available to provide retirement income funding? The available selections are innumerable and include vehicles like ROTH IRA’s, Defined Benefit (Pension) Plans, Traditional IRA’s, Real Estate and Annuities to name a few (more on income in a bit).

“Tactics without strategy is the noise before defeat.” –Sun Tzu

As a financial planner, I have noticed throughout my career that clients tend to focus on the “tactic” without first establishing a strategy for their retirement.

Clients have been conditioned, through the media (think marketing), to focus on selecting investments for their accounts.

When plotting a retirement strategy, investment selection should be the last step, not the first.

Let’s step back and consider the larger picture in developing a personal financial strategy.

If the goal is an active, fulfilling retirement, define what that means to you. Maintaining your current lifestyle? Travel? Visits to the grandkids? Starting a new business or career venture? It’s important to define the types of activities and lifestyles you would require for a fulfilling retirement.

Next, let’s take a look at some of the risks we incur during retirement. Obviously health is an issue. Hey, let’s face it, we’re not getting any younger and chances are we’ll need medical assistance at some point.

The laws and rules for the U.S. medical system are changing faster than the participants at a Middle East peace conference.

The average couple retiring today at age 65 will need approximately $160,000 in savings to pay their healthcare tab, including insurance premiums and uncovered medical expenses. The good news is that advances in medical technology leads to better treatment and longer lives.

What about that pesky long-term care everyone keeps talking about? The average annual nursing home care cost is $73,000 (depending on where you live) and roughly 70 percent of those reaching the age of 65 are expected to need some type of long-term care during their lives.

What is the strategy for handling this issue? Children, neighbors, spouse, Medicaid or Medicare are all less than ideal options.

Should you purchase long-term care insurance or self-insure through a savings plan? The answer depends upon a number of variables and should be considered as a part of your overall financial retirement strategy.

Long-term care, like health issues can both be SPOF if not managed correctly prior to entering the retirement.

To this point, we have isolated a couple SPOF’s and now need to move on to projecting income and expenses using …  wait for it … a budget (ugh), or today what’s kindly referred to as a “Spending Plan.”

Once you have identified expenses and income requirements, we can look into the “tactics” necessary to generate a reliable income stream that avoids a SPOF.

In the follow up articles, we’ll identify various income producing vehicles, the risk and potential rewards of each, while learning to avoid the Single Points of Failure.

Editor’s note: John Brunett is the Chief Investment Officer for the LANB Investment Group. His background includes more than 18 years in the financial services industry. He has extensive experience in the areas of bank investment programs and financial planning.

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