"When I ask people, "What's the purpose of money?" I get all sorts of responses."-
Have you ever asked yourself, "What is the purpose of money?"
It may seem like a silly question. After all, money forms the locus of our existence, and we spend our days making it, investing it, and saving it.
Recently, I asked a caller to my radio program what he thought the purpose of money was. He responded, "Growth. I want to grow my mone
y." A lot of people feel this way.
But is "growth" the true reason money exists, or is growth merely a function of money?
What I tell my clients and prospects about the purpose of money is something you may have never heard before. It is a simple yet profound idea that, if properly understood, can help people retire with less stress and more comfort than they thought possible. The reality is that money serves two and only two purposes: life and death.
Using money while you're still alive is money for life, also known as income
. No matter how you spend it, whether for daily necessities, paying bills, or taking vacations, that money is there to help you while you live. Money also serves a purpose when you die, as a vehicle for creating a legacy for your loved ones. When you've planned your life correctly, you can enjoy a safe, comfortable retirement, knowing that what remains of your wealth will be there as a legacy for your heirs.
Because money fulfills two distinct yet related purposes, your financial advisor must have the tools and skills to help you plan for both purposes. Too often, I see advisors focused so much on Growth in the accumulation phase
that they don't give much thought to the spend-down part of their client's lives. That's a huge mistake since outliving retirement income would be a disaster for most people.
Products and strategies designed to help your money grow while still working differ significantly from those needed to create streams of retirement income you won't outlive. For example, "no-market-risk" strategies allow you to achieve some growth without placing your savings at risk chasing returns on Wall Street.
The fixed indexed annuity, or FIA, is the product I use to ensure my clients have a stream of income they won't outlive. A FIA is ideal if you want the protection of principal and income for life and a shield against potentially outliving your savings. A FIA allows you to participate in some market upside while protecting your principal investment against downturns. FIAs are a great supplement to Social Security, itself a type of annuity, and company pensions. FIAs and other safe money products are part of a solid Plan for Life.
Unfortunately, though, I meet many seniors on another kind of plan, the Plan for Death
. The Plan for Death goes something like this. You work hard and save your cash. You then invest, hoping you'll earn some hypothetical, non-guaranteed rate of return. Or, you get a short-term return with no guarantees. With a Plan for Death, you'll need to take that cash out when you reach retirement age, and perhaps you'll have a lot less money than you anticipated. Even if you manage some gains, they may get eaten away by fees, and the next 2008 meltdown could be right around the corner.
When you arrive at the time to take income, how much should you withdraw? 4%? 3%? Or do you just take whatever you need, cross your fingers, and hope for the best? It's possible that having chased after returns, you will enter into retirement without enough money to last you until the end. That would be a disaster. The Death Plan's success depends on you dying at a specific age, and you can only guess how long you might live.
On the other hand, a well-designed Life Plan is a balanced retirement approach that helps you gain more confidence and peace of mind. A qualified retirement and income advisor can help you create a blueprint with the right mix of safe money products to ensure you can leave something to the ones you love without spending too little on yourself when you retire. To me, the choice is obvious.