There are three financial stages most Americans will experience:
1. First, we begin by accumulating some assets and savings
2. Eventually our focus turns to preserving that net worth
3. Finally we turn to that nest egg we have built and look to support our retirement.
Accumulation, preservation and distribution may look a little different to each of us, but each stage will have distinct goals and a set of priorities.
The primary focus of the accumulation phase is on how much to save and where to save it. Should you use a 401(k), a traditional IRA or a Roth IRA? How much do you need in an emergency fund? How much will really get “saved” versus becoming a “put-and-take” bucket – putting it in, only to take back out sooner than later?
The preservation stage is interesting because there is no arrival date or finish line. In my opinion, the preservation stage occurs when the return on what you have already accumulated is more important than any additional savings you accrue. Not that you shouldn’t or won’t save more, but that the focus is on maintaining the nest egg that is now (hopefully) building upon itself.
The distribution phase is the scariest for individuals and the least understood by the financial industry. Individuals need to begin to liquidate assets that they worked hard to accumulate, and there are so many unknowns: “How long will the money last?” “How much can I take?” “Do I really have to pay taxes again?”
These are all common questions we receive. This stage is critical for financial success. As my friend Ed Slott of IRAhelp.com would say: “It does no good to win the first three quarters of the football game and lose in the fourth quarter.” Many people get through the accumulation stage in good order. Some get through the preservation stage with limited scars. Few get through distribution without a great deal of planning.
The challenge in distribution is multifaceted, but it usually begins with an internal issue of the friend becoming the foe. The financial services industry is in the “collection of assets” business, not the “distribution of assets” business. Money shops are not paid to plan for distribution, and have ignored the wave of baby boomers now facing the distribution phase of their lives. My industry is attempting to force tools and mechanisms designed for the accumulation phase into to service as distribution devices. Whether these mass accumulation devices work will be left for another discussion.
The notion of mass distribution is seriously flawed. In my professional opinion, as a money manager and certified financial planner, this is a bad concoction. As an instructor of financial planning at Purdue University, I will tell you the math applied to distribution planning is flawed in many cases.
We will spend the next few weeks on this topic as it is near and dear to my heart. Success comes from good strategies mixed with good execution. Your retirement is not about averages. It’s personal.
Joseph “Big Joe” Clark is a certified financial planner and the managing partner of the Financial Enhancement Group, LLC.
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Joseph "Big Joe" Clark is a certified financial planner and managing partner of the Financial Enhancement Group, LLC. He can be reached at bigjoe@yourlifeafterwork.com.
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Big Joe Clark: What is most important for you?
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