You’re in the FRS Investment Plan (or thinking about switching to the Investment Plan), and retirement is fast approaching. Right now, while you’re still working, you get a paycheck every two weeks, like clockwork. It’s stable, you don’t have to think about it, and you can count on it. But with retirement in the Investment Plan, how are you going to do that? How are you going to get income OUT of your FRS investment plan? What’s your strategy? Let’s look at a few options you have.
It’s one of the most common questions we get, so I know there’s a lot of concern here. And from what we hear, it’s not only about HOW you draw income from your Investment Plan, but HOW MUCH income can you take and reasonably expect that your money will last longer than you do, or that you’ll be able to leave that legacy you want.
The problem with that second question, the “how much” question, is that we don’t know a couple of key variables. Like, how long are you going to live (could be, and hopefully is, a long time, right?). And we don’t know exactly how much your money is going to earn along the way. Let’s face it: If we knew those two things, it’d be pretty simple math. But we don’t. And don’t ever let anybody tell you that they do. Because they don’t either.
It's that uncertainty that insurance agents prey on. I’m talking about annuity products sold by insurance companies. Think long and hard before you buy an annuity with your Investment Plan money. I mean, why someone would leave the pension, which is already a pretty high bar annuity out there, as far as I can tell, to switch to the Investment Plan and then buy a lower-quality, commission-driven annuity from an insurance company and their salesperson just shows me how confused people are. Yet sadly, we see it happen. Before you sign on the bottom line for that annuity, put it in front of somebody knowledgeable who isn’t earning a commission off it for their perspective. Might be enlightening.
One strategy for delivering income that we see quite frequently, and it’s certainly been around a long time, is to seek out those types of securities for your portfolio that concentrate on delivering high dividends and income streams. The idea is to focus the portfolio on higher dividend stocks as well as fixed income and bonds with higher income.
It's not a bad idea, but there are a couple of things you need to be aware of. One, it takes a lot of work and some expertise, so going it alone might be kinda tough. I mean, will you always have the time to give the portfolio the ongoing attention it needs and deserves as dividend environments change and companies change? So maybe working with an investment professional or, at the very least, looking for a mutual fund that has that income focus might be a good idea.
Two, you might be missing out on some of the benefits of diversification, especially if you over-focus here and lose potential long-term growth in your portfolio, which you are going to need to keep up with inflation for the rest of your life. Stuff isn’t always going to cost what it costs now, and if your portfolio isn’t able to increase its payout to you over time, at least with the pace of inflation, it’s going to start hurting eventually.
We’ve found taking a more holistic approach to income and recognizing that two things are occurring in portfolios that make them grow … income (as we discussed) as well as capital gains. A total-market, global strategy that captures both income as well as the long-term capital gains we’ve historically experienced in markets provides us with the ability to draw income and pace it with long-term inflation rates, giving us a more comfortable experience with a higher likelihood of keeping up with inflation for a long retirement.
And finally, getting back to that question about “How much should you take?” Well, that really depends on what your goals are, especially around how much you want to leave behind if legacy is part of your reason for being in the Investment Plan. What’s right for one retiree may be wrong for another because, well, people are different and have different things going on.
A good, experienced advisor can help you with all of that. If not us, I’d urge you to consider only having these kinds of conversations with an advisor that is not compensated by selling products like annuities, life insurance, or investments … somebody that is fee-only that won’t have an incentive to sell you whatever the product is that pays them the highest commission. But that’s a whole nuther video.
Hey, thanks for watching! Let us know if you want to sit down and have a chat about this or any other concerns you have about your retirement. We work with FRS Special Risk folks all over the state of Florida. Give us a call—I think you’ll be glad you did. Stay safe out there!