Perspectives on Planning

Retirement Saving Starts Now... Right Now

An Income Primer that all of your clients might consider

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at

Your retirement income investment plan must start now, right now, no matter how old or well heeled you happen to be.

Step One is to understand what a retirement plan is, and to identify the three large numbers you need to keep track of while you are developing your stash.

With these three totals on your spreadsheet, it’s much easier to develop long-range retirement income goals that make personal sense.

A retirement plan must be an income production plan. Guaranteed retirement income – projected expenses = the gap. Don’t have a gap?… add parents and children to the expense number. There’s always a gap.

Employer provided pension plans, Social Security, and fixed income annuities, are retirement income programs, monthly income machines you have paid dearly for but which may not be adequate to cover your retirement expenses— most of us will need more income than our guaranteed benefits provide.

Plan as Process

  • The retirement plan is the investment process you employ to eliminate the gap between projected guaranteed income and a conservative estimate of your retirement expenses.
  • You just can’t start the process too soon. The sooner and smarter you invest before retirement, the easier the transition from full employment to full vacation will be.

Smart investing involves separating your security selections by purpose, and monitoring their performance in the same way. You’re never to young to start developing the income side of the portfolio, and once you start to spend the income, it is much more difficult to invest effectively and unemotionally.

Since your income will need to remain secure and constant through several economic, market, and IRE (interest rate expectation) cycles, you need to develop appropriate market value expectations, while keeping your eye on the income ball. Income, realized income, is the only thing you can spend without depleting the productive value of the assets in your investment portfolio.

Neither Market Value nor Total Return produce one penny of spending money

Obvious, you’d be surprised, and most people will ignore it until the market value of their portfolio begins to shrink or to stop growing. If you are retired right now, it is likely that you have been depleting your productive asset base for the past nine months.

If you invest properly, your income should continue to grow in spite of changing market conditions and fluctuating market value numbers… even during major market downturns.

You must learn to expect market value fluctuations and to take advantage of them— within appropriate quality, diversification and income generation standards.

Retirement income planning became more difficult for most of us around the time corporate America realized that defined benefit pension plans were far too expensive to manage and maintain. At around the same time, the Social Security trust fund somehow disappeared (Did it ever exist at all?), and more and more of our tax dollars were needed to support our aging friends and relatives.

Why haven’t the myriad of defined contribution programs been able to fill the retirement income gap?
Because millions of totally investment-inexperienced people were given discretion over billions of investment dollars that could be tax detoured out of their paychecks and into IRAs, 401ks, 403bs, and other savings/investment programs… without one retirement income bone in their collective bodies.

Meet the Masters

The Masters of the Universe are still ROTF-LOL (ask you teenager) while the investment gods gape helplessly in disbelief

Self directed investment programs generated a need for an investment media; the investment media fueled the speculative juices of an emotional and naïve mass of newbie investor/speculators; Wall Street created tens of thousands of new products and speculation schemes to sponge up the ignorant dollars.

The Masters of the Universe are still ROTF-LOL (ask your teenager) while the investment gods gape helplessly in disbelief. Defined Contribution plans are just not designed to be retirement plans— even if your employee benefits department, the media, Wall Street, and POTUS assure you that they are. Most are difficult, if not impossible, to self-manage with a retirement income objective.

Still, these benefit plans are necessary and quite capable of taking you close to where you want to be. Their primary drawback is the false sense of wealth and retirement security that they promote. Either the money has to be converted into an income portfolio— a costly and time-consuming process— or far too many mutual fund shares have to be sold to produce the spending money.

Most people think of savings and investment programs as retirement plans, and rationalize away the need for additional, outside development of an income investment portfolio. This is because all of the information they receive speaks to market value growth instead of to income. It’s very likely that less than 70% of the money will be yours to spend!

What, you say— why? Three examples

  • A NYC resident with a $3 million IRA retires with the expectation of maintaining her life style. Even invested for income alone, $15,000 per month is easy to generate. But how much more has to be disbursed to satisfy three levels of tax collection?
  • Next example. A similar 401k portfolio of mutual funds or ETFs during a correction— now your spending money is coming mostly from principal!
  • A “safe” and cheap portfolio invested in the Vanguard Retirement Income Mutual Fund, generating barely 2% in spendable income.

Even though defined-contribution plans are excellent mechanisms for growing an investment portfolio with your hard earned, pretax, dollars (and your employers generosity), all plan sponsors, government regulators, and most plan participants are market value and total return myopic.

Income is totally ignored by the DOL and other regulators, whose focus is on expenses and total return… an employer whose plan pays 6% after 2% expenses would be fined while, under existing regulations, the Vanguard (2% income provider) would be applauded.

Most people expect their 401k or IRA program to be an “up only” market value experience, even after employer contributions have stopped and distributions begin; few realize that they can generate significant income securely from other types of securities than those forced upon them by employer programs and Wall Street product salespersons.

The “buy and hold” mutual fund and Index ETF mentality doesn’t transition well from growth to income— regardless of the fund category or description, and the idea of helping people transition into a comfortable retirement hasn’t stopped congressional tax collectors.

It should be apparent to all of you that the market cycle is just as likely to be in a down phase when your gold watch is presented as it is to be rocketing skyward. You have to do more, and less, to secure a comfortable (and growing) retirement income.

  • Step One of the retirement plan is developing a focus on income, and understanding that spending money and market value are not blood relatives.
  • Step Two is developing the right combination of tax deferred and tax-exempt income— and an appreciation of Working Capital.
  • Step Three is the realization that income focused professional management is in short supply… even at Vanguard.