| Saving for retirement is not merely about getting a | | | | $0.00. Without an income stream Mr. Jones risks |
| stash of cash. You need to think of saving for | | | | outliving his retirement savings. |
| retirement in two ways: developing a reliable income | | | | Mrs. Smith has more retirement income than she |
| stream and adequate accumulated retirement savings. | | | | needs, although she has no savings to start with. She |
| The two concepts are related but distinct. Failing to | | | | religiously saves $1,000.00 a month in a high-yield |
| separate the two will necessarily blur the lines and | | | | savings account (6%). However, an unfortunate |
| make it difficult to maintain one or the other properly. | | | | situation arises after just 18 months of retirement. |
| An extreme example can best illustrate the | | | | Mrs. Smith needs $80,000.00 immediately but only has |
| importance of having a retirement fund and income | | | | close to $19,000.00 in savings! |
| stream during retirement. | | | | Mrs. Jones has few options and would likely have to |
| Suppose Mr. Jones has a retirement fund of | | | | borrow just over $61,000.00 and repay it with |
| $400,000.00 with no income stream. Alternatively, | | | | interest. It is an additional burden on her income and |
| Mrs. Smith has a retirement income of $4,000.00 with | | | | affects her ability to save as well. She has to live |
| no retirement savings. To maintain a comfortable | | | | rather frugally for a while. Worse yet, she is aware |
| lifestyle, both Mr. Jones and Mrs. Smith need | | | | that she is not financially able to cope with |
| $3,000.00 per month. | | | | unexpected or contingent expenses that could arise. |
| Mr. Jones invests his $400,000.00 lump sum in a | | | | Mrs. Jones is not equipped to deal with life's |
| high-yield savings account, where it compounds at | | | | uncertainty or even the certainty of a rising cost of |
| 6% per annum. However, Mr. Jones has no income | | | | living. |
| stream, so he has to rely solely on money working | | | | Without adequate retirement savings, you may not |
| for him. However, his monthly interest payment is | | | | be equipped to handle unforeseen expenses or the |
| only $1,947.00 and he needs $3,000.00. He cannot | | | | rising cost of living. Inadequate retirement income can |
| invest the fund at a much better rate, since he | | | | deplete your retirement savings faster that you |
| needs immediate access to it either. Therefore, he | | | | should as well. If Mr. Jones had half of his income |
| withdraws some of the capital in the first month. | | | | needs, his retirement savings could extend way |
| What happens next is that Mr. Jones' starting balance | | | | beyond his 19th year of retirement or be used to |
| for the second month is even lower- $398, 052.97. | | | | meet rising living costs. |
| Every month, Mr. Jones must withdraw from his | | | | With individuals generally living longer, planning for at |
| capital to finance his income deficit. Eventually, that | | | | least 30 years of retirement is necessary. If you |
| deficit financing will deplete his retirement savings. By | | | | balance retirement savings with your retirement |
| his 19th year of retirement, Mr. Jones will have no | | | | income, you have a better chance of overcoming |
| retirement savings and no income. That this estimate | | | | longevity risk. Adequate retirement income and |
| does not factor inflation on living expenses suggests | | | | savings prepares you for the certainty of inflation |
| that Mr. Jones will actually experience a reduction in | | | | and the uncertainty that life inherently bears. |
| standard of living way before his balance reaches | | | | |