Creating a Plan for Guaranteed Retirement Income

Regular readers of this blog may recall that I have been studying the work of Zvi Bodie, a professor of finance at Boston University. (I mentioned Prof. Bodie in my post on Retirement Income and the Myth of Equity Risk.) After much consideration, I’ve decided to adopt Prof. Bodie’s concepts into our retirement income plan. More particularly, I have created a plan to provide guaranteed retirement income. I will explain.

What is a Retirement Income Plan?

When most people discuss “saving for retirement”, they think and speak in terms of accumulating wealth, as in building a retirement “nest egg.” Less often do they specifically consider the more critical issue of retirement income.

When I retire, my first concern is having enough income to support a basic retirement lifestyle. This will allow me to work or not work, as dictated by my desires, not by financial need. Wealth can provide income but to provide a secure retirement, that income must have two characteristics.

• The income must be guaranteed to last – month after month and year after year.
• That basic retirement income must be protected against inflation.

Without these important security blankets, poor investment outcomes and/or high inflation could force me to “unretire” or to lower our standard of living to a level that we would find undesirable or even unsustainable. Market losses are known to cause sudden trauma to your retirement savings from which it can take years to recover. Inflation is a slow killer but can be equally deadly to retirement income.

For example, pensions and annuities are nice but in most cases, they are not indexed to inflation. Social Security retirement benefits have both characteristics: guaranteed by the government and indexed to the cost of living. Investments found in most 401(k) plans and IRAs have neither. They can lose value – big time as in 2008 – and are not guaranteed to keep pace with inflation.

My wife and I are counting on receiving Social Security retirement benefits. I have calculated that these benefits will not be enough to sustain our baseline retirement lifestyle. We have substantial investments in well-allocated mutual funds and exchange traded funds in my 401(k) account and in our IRAs. But most of those investments are not calibrated to throw off retirement income that is guaranteed and protected against inflation. That makes me nervous because the future clearly presents risks of further market declines and/or high inflation.

So we need a plan that will provide guaranteed retirement income – inflation protected – to supplement Social Security. It must be failsafe, meaning that no matter what happens to our investments or to the economy, our baseline income needs in retirement will be provided for.

Our Failsafe Retirement Plan

A core teaching of Prof. Bodie’s research is that investing in stocks does not get less risky over longer periods. This, he says, is a myth perpetuated by the investing industry. After studying his research, I believe him. Based on this, Prof. Bodie also believes that for most investors saving for retirement, stocks should not be counted on to provide needed retirement income. He has convinced me of this as well. Instead, he recommends that investors accumulate a portfolio of Treasury Inflation Protected Securities (TIPS) and I Series Savings Bonds (I-Bonds). The TIPS and I-Bonds combine to provide retirement income that is guaranteed and protected against inflation.

Bodie is not opposed to conventional investing in stocks, mutual funds, and ETFs and neither am I. His point is simple and logical. Secure your essential retirement income needs first. Use what’s left over to risk in the market if you wish.

We actually started buying I-Bonds in 2000 as a future inflation hedge. They are doing well, yielding 7% over the past year and over 5% since inception. Our plan is to supplement them with more I-Bonds (if the fixed interest rate goes up – it’s 0% now) and with TIPS bought at auction and on the secondary market.

To determine how much we needed to invest in TIPS and I-Bonds, I created an automated Excel worksheet that does three things.

1. It helped us estimate what our retirement income needs would be.
2. It calculated how much we would need to invest each year to provide the guaranteed income that Social Security would not.
3. It helps us create and track a portfolio of investments that we could purchase to provide this guaranteed retirement income.

Now we have a plan that we can implement that can give us a high confidence level in our retirement future.

Your Plan for Guaranteed Retirement Income

When I finished creating our retirement income plan, I thought that others might be interested in doing the same thing. Therefore, I enhanced the worksheet into a complete system for retirement income planning. I call it the FAILSAFE RETIREMENT™ System. It is now available for purchase and download from my new Failsafe Retirement blog site. That site has a lot more information about the system and the retirement investing research behind it. Read it and maybe you will reach the conclusions that I have. I will be periodically blogging from that site on issues related to retirement income planning. If those issues are of interest to you, head over there, select the “Blog” link, and subscribe.

To give you a preview, this is what the Failsafe Retirement™ Budget Planner looks like:

The Budget Planner Worksheet makes it easy for you to predict your retirement income needs without worrying about inflation. The right hand side of the Worksheet contains links to instructions and other resources on retirement income planning.

The second Worksheet is the Savings Calculator which looks like this:

The Savings Calculator Worksheet uses information about you and from the Budget Planner to calculate how much you need to save and invest each year to provide the guaranteed retirement income that you will need. There are more links to a lot of help and instructional resources.

The third component of the FAILSAFE RETIREMENT™ System is the Income Plan Builder:

This Worksheet helps you create and track a portfolio of investments that will fund your retirement income plan. There are links to resources that will teach you where and how to purchase these investments yourself, without using a broker or incurring any transaction costs.

Finally, the System includes a Plan Summary and Progress Report:

This Worksheet summarizes your work and your retirement income plan in plain English and reports your progress.

As I’ve said, there is much more about this System at the Failsafe Retirement site.

Why am I selling the System and not giving it away? Good question. The answer is that I am trying to add sources of passive income to our cash flow. This income will be used to purchase investments for our retirement income plan. I spent a lot of time developing the system and worksheet. I think it will deliver value to anyone planning for retirement. Think about it this way: The System costs less than three trips to Starbucks or a movie ticket with popcorn.

Final Thoughts, Giveaway and Thanks

First, I want to thank all of my readers for their support of Go To Retirement and my other blog, Tough Money Love. If you will leave a comment on this post prior to September 23 saying that you would like to own a copy of the FAILSAFE RETIREMENT™ System, you will be automatically entered in a random drawing for a free download. (Other comments will be deleted before the drawing.) Six random numbers will be generated by random.org on September 23. If your comment number is one of the six random numbers generated, I will email you a coupon code for a free download. (Be sure your comment uses a working email address.) My decision as to the winners will be final.

Second, I want to thank Mike at Four Pillars, John at the Mighty Bargain Hunter, Evan of My Journey to Millions, and Pinyo at Moolanomy for evaluating a beta version of the System and sending me some helpful feedback.

Finally, spend some time really thinking about where your retirement income will come from. Today I picked up some groceries at Kroger. The gentleman who packed my grocery bags had to be at least 70 years old. His name was Jerry. Bagging groceries for minimum wage is not the kind of part-time job most retirees would choose for fun or just to stay busy. Jerry didn’t look like he was enjoying himself. Don’t end up like Jerry. Make a plan.

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