Record-breaking heat during a major marathon is difficult to plan for and the consequences of being ill-prepared can be catastrophic. Averting financial disaster also requires an attention to preparation.
Prior to the panic of 2008, it was a rare occurrence for me to consult on buying back years of “service credit” to increase a guaranteed retirement pension. Now it happens on a regular basis. Buying, rather than earning years of service, requires payments of money into the plan. This money usually comes from savings, including IRAs, 403(b) or 401(k) plans.
While each case needs to be evaluated based upon the individual’s circumstances, there are some overarching principles which come to bear. Evaluating the net present value of the alternatives is one issue that everyone gets. Most people overlook the issue of liquidity.
The Chicago Marathon race directors anticipated the heat wave and increased the water supply accordingly. Yet sometimes even the best plans unravel due to overwhelming circumstances.
Runners in the best shape had the most options. Many used water stops to both rehydrate and to douse their heads with cool water. Likewise, those retirees who are best prepared, have the most options.
Assets saved for retirement have a principal balance, which can be accessed during retirement. Income produced by those assets can be consumed or reinvested according to changing needs.
The less proficient, slower runners discovered that water stops were unable to meet their needs. They couldn’t rehydrate, let alone cool down.
Most pension plans do not provide any access to principal. As new costs arise during retirement, the pensioner can find that the “defined benefit” is unable to meet their needs. They might not be able to keep pace with inflation, let alone indulge.
After the best runners finished, the race directors stopped the race. They were out of water. Hundreds of slower runners were sick from dehydration. One died.
Maintaining personal assets, such as those in IRAs, 401k or 403b plans, can help the retiree provide liquidity for the unexpected events that ultimately will occur during retirement. This can be the difference between finishing the race and having the experience cut short.
TRACKING #1-090620