The Four C’s of Retirement
Simplify retirement planning by homing in on these general guidelines
Given the amount of information swirling about the economy in general and, more specifically, around retirement planning, it can be helpful to simplify one's thinking. Consider, perhaps, the four C's of retirement as a way to become more focused and confident about retirement.
Developed by Allianz Life Insurance Company of North America, the four C's are clarity, comfort, cost of living and certainty.
The four C's, states Gary C. Ghojwani, chairman of Allianz Life, are "a new way of thinking about retirement income planning that was inspired by the diamond industry, which boiled down the infrequent, complex, emotional and significant purchase of a diamond into the 4 C's of ‘cut, clarity, color and carat.'"
"The first of the 4 C's, clarity is the analytical process of gathering facts to see the big picture and understand how one's savings will come together to fund retirement," Ghojwani writes. "Clarity also comes from learning income strategies and how risks, such as inflation, may affect their portfolio."
Among the questions retirement planners should ask are:
- How much income do I need?
- What sources of guaranteed income do I already have?
- What is my risk tolerance?
One way to start, advises U.S. News and World Report, is to "run your numbers."
"Once you know how much you will get from Social Security (and a pension if you have one)...estimate the annual income you need to pay all your bills, subtract the amount you will get from Social Security and a pension, then multiply that amount by 25 or 30 years...," writes the website's retirement editor, Emily Brandon.
This may be the most important C of them all. After all, isn't comfort the point of retirement planning in the first place — determining what a person needs in order to feel comfortable in retirement and then figuring out how to reach that level of financial security?
"To feel truly comfortable, people need to feel their money will last," Ghojwani explains, pointing to a 2011 Allianz Life study in which 76 percent of baby boomers said they would choose a financial product with a 4 percent return that would be guaranteed to retain its value over a product with an 8 percent return that would be vulnerable to market risk.
Cost of living
Retirement planners can't forget about inflation, because it will decrease the value of any money they save right now. In particular, experts point to the effect of inflation on health care costs.
"If you're a 65-year-old female, your actuarial average lifespan is another 20 years," writes Jason Hull of U.S. News and World Report. "That's a long time of average life expectancy, and with inflation — particularly healthcare inflation — you will need to continue to grow your portfolio."
"For that reason," Ghojwani states, "boomers will want to consider shifting some assets into a retirement vehicle that grows income as their personal protection against inflation."
We can count on more than just death and taxes, says Ghojwani. Americans should add increasing life expectancies and market volatility to the list, which means that retirement planners and retirees alike can easily begin to feel uncertain about their own future.
On the other hand, he explains, certainty is still attainable.
"To achieve a level of certainty, one strategy is to convert a portion of assets that are exposed to volatile markets into a guaranteed-income product such as an annuity that is backed by the claims-paying ability of the issuer," he tells retirement planners. "This can help manage so-called sequence-of-return risk, when market declines early in retirement shrink the years that savings will last."
The folks at U.S. News and World Report, quoting Gail Marks Jarvis, author of Saving for Retirement (Without Living Like a Pauper or Winning the Lottery), suggest another strategy for creating certainty. Retirement planners should regularly raise their 401(k) or IRA direct deposit level, so long as it suits their lifestyle.
"I would increase the percentage 1 percent, and if after three months, I am paying my bills and having a little fun, I would raise that another 1 percent," Brandon quotes Marks Jarvis as having told the website.
Retirement planning can be confusing, but for those heading toward retirement — which, on some level, is all of us — it's simply the right thing to do. Hopefully, following the four C's is a step in the right direction.