Why a Lump Sum Retirement Plan is NOT for Me

By | December 29, 2011

One of the most common ways that people plan for retirement is to save a little bit over the course of their career. By saving a little each year, between compound interest, discipline to keep saving, and the time to build up your nest egg, this can be quite a successful way to fund your retirement. Yet, it isn’t full proof. In fact, there are many reasons why I don’t like the idea of a lump sum to fund my retirement.

It’s Hard to Keep Up with Inflation

Whether you like it or not, when you take this approach to retirement, you are dependent on beating out inflation. In other words, because your primary income is coming from the interest from this lump sum, in order for there to be a true income, your interest rate has to be higher than the rate of inflation. While there are years that inflation is practically zero, that isn’t always the case. Trying to beat out inflation requires risk. In order to increase your potential income, you typically have to place more money in higher risk funds like stocks instead of bonds.

You Wonder if You are Going to Live Too Long

Whenever you are living off of one lump sum, people often suggest a “safe withdrawal rate.” This means that you can withdraw X percentage of your entire fund and be able to rest easy that you will have enough money to live on. This is typically around 4%, but it varies based on how long you expect to live. What I don’t like about this idea is that you are always counting down your life. Instead of appreciating life for what it is, you are constantly concerned that you are going to live to long. What kind of life is that?

Don’t Put Your Eggs All in One Basket

Any financial adviser will tell you that you need to have a diversified portfolio. This is to protect against drastic falls in the economy. With this being the golden rule of investing, I can’t help but wonder how often drastic falls happen. If it is a normal occurrence, why would anyone trust their entire source of income on the economy. Granted, a diversified portfolio often protects you from the worst falls, but it can only protect you so much. In the fall of 2008, people lost nearly 1/3 of their stock values. If my retirement is dependent on those figures, I am going to have a hard time sleeping at night.

Is There an Alternative?

While I did my best to show the weak points in this idea of living in retirement off this method of retirement, it doesn’t mean it is part of my retirement plan. I discussed in my post on passive income streams that I expect to invest in dividend paying investments. Yet, I refuse to rest solely on this method. Instead, I would rather create income that is going to be passive (or close to it) with the reassurance that it will be there no matter what. The most secure long-term investment that I see is real estate. While it can be difficult to get started and manage multiple properties, if executed correctly, someone can retire in 30 years with a huge cash flow.

Furthermore, I plan to supplement the long term approach of real estate with what I consider to be a short term answer – blog income. While I can’t guarantee that blog income will go away any time soon, I don’t think it will be as easy as it is now in 5 to 10 years from now. Regardless, it doesn’t mean that I am not going to take advantage of it now if it gets me out of my day job. I would much rather have a guaranteed income each year from blogging and real estate and then leave my traditional retirement fund untouched for an emergency. If left untouched, it will continue to grow and it will offer me even more security. Most importantly, my real estate income will offer me the protection that I personally can’t find in the stock market.