Flooring
When people ask what I do for a living I typically respond with, “I’m a financial consultant,” which is usually met with a polite nod and smile and we move on. I really need to work on that elevator speech, I’m just not a hard sell. While I would love to go into great detail with every person about what I do, because I love what I do, most people don’t actually care. They hear the word financial and tune out. I don’t blame them, it’s not for everyone, and talking about money makes people uncomfortable. But, since you’re here reading this, you’re either my mom or grandma (my loyalist blog readers) or you are someone who might actually be interested. So, I thought I’d talk about one of the many strategies I use when I work with my clients.
After being in the business for about 5 years, I decided to sit for my RICP designation. RICP stands for Retirement Income Certified Professional. In our office, we work with people from all backgrounds, ages, and professions with all kinds of financial situations. With them, we really work in two phases, wealth accumulation and wealth decumulation. While growing people’s assets comes with its own set of challenges, the decumulation phase is often times much more complex (AND might I say, FUN). Decumulation is where that RICP designation comes in handy. We consider the decumulation phase to be the income generation phase. This is the point at which the paychecks have stopped and we shift from a focus on growth to a focus on income. One of the strategies we use for the income phase is called flooring.
The floor of our income strategy is built from what we call mailbox money. If you’ve read my blog before, there’s a chance you’ve seen that phrase. Mailbox money is any source of income that is not dependent on market performance or you being in the workforce. Social Security, pensions, guaranteed income annuity payments*, and royalties are all considered mailbox money (there are plenty more as well). The more mailbox money you have, the stronger (and larger) floor you have for spending in retirement. We use the floor to cover necessary expenses such as insurance, rent/mortgage (if necessary), groceries, and other medical bills. We then leave their discretionary spending to be covered by their market assets. This way, even in environments of poor market performance, we know that our client’s basic needs are covered.
I like to think it’s never too early to start planning for retirement, but really if you’re over the age of 40, now is a good time to start thinking about your floor. How much guaranteed money will you have coming in each month once the paychecks stop? At age 25 you’ll begin receiving your social security statements every 5 years. This is an important number to know and watch as it changes from statement to statement. As you approach retirement age, we strongly encourage our clients to create an account on the social security website to begin checking for accuracy and doing a little more detail-oriented planning, but until then, the 5 years statements are just fine. If you work for a company that has a pension plan, look into your expected benefit amount. As I mentioned briefly, there are certain investment assets that allow for guaranteed income*. These are called guaranteed income annuities. These are investment vehicles that are not suited for everyone, but in the right situation, they can be a useful tool to help build an income floor. If you have specific questions about that, feel free to reach out. Start pulling together those income sources and have a conversation with your financial professional about how much you’ll need in “floor money” to cover your necessary spending (a detailed budget would really come in handy here…).
The flooring strategy is only one of the many we use and it doesn’t work for everyone. If you don’t have much for mailbox money, your floor will be very small, which means you’ll need more in invested assets. Flooring can be particularly beneficial for those who are very risk averse. A larger floor means a smaller dependency on the stock and bond markets for income generation. By starting to plan early, you have the ability to build a stronger, larger floor. If you have questions or need helping building your floor, feel free to reach out. Ed and I are always happy to help!
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Molly VanBinsbergen and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. *Guarantees are based on the paying ability of the issuer.
