How to build "money for life"

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(MoneyWatch) My often-used metaphor for wealth building is to think of money as stored energy. That energy, and the more of it that we have, powers our financial independence and allows us to do whatever gives our lives the most meaning.

In his new book, "Money for Life," fellow CBS MoneyWatch blogger Steve Vernon offers some invaluable advice on how to build wealth for life and for what you want to do with that life.

Vernon evaluates various financial options against four main goals. The first is longevity protection, which is to say making sure we don't outlive our money. Second is inflation protection, as increasing spending with inflation only allows us to maintain the same lifestyle. Third is flexibility and the potential to leave a financial legacy, meaning having money for emergencies and for passing on to your heirs. The fourth goal is minimizing the market risk that can wipe away the three previous goals, as many older Americans painfully learned during the  financial crisis.

Vernon evaluates various ways of generating a paycheck for life against these goals. For example, buying an immediate annuity may generate a paycheck for the rest of one's life, but it also leaves the recipient exposed to inflation. Though you can buy an inflation-adjusted annuity, doing so drastically cuts your paycheck.

Another method of generating a paycheck is to live off the income being generated from a portfolio of investments while leaving the principal intact. This system provides longevity protection and inflation protection, and is likely to leave a legacy. Unfortunately, it generates a pretty meager paycheck as well. Pursuing this method can also lead to developing portfolios concentrated on income while taking enormous risks with the principal.

So-called "systematic withdrawals" are another paycheck Vernon evaluates. These are the so-called "safe" withdrawal rates. The book examines the what is known as the "4 percent rule," which directs retirees to withdraw this amount from their savings annually for their living expenses, increasing with inflation. For example, a $100,000 portfolio with 3 percent inflation would generate a safe withdrawal rate of $4,000 the first year, $4,120 the second year and so forth.

My own work on the 4 percent rule shows the impact of expenses -- and emotions -- can drastically lower this safe rate. Vernon's take is that systematic withdrawals do a poor job of providing longevity insurance, but does well in providing inflation protection and leaving a family legacy. It leaves you exposed to market risk, however.

Vernon says that combining elements of all the above methods is probably the best way to achieve his core four financial goals. He also examines when to start collecting Social Security and generally recommends delaying it, as long as people remain in good health. I've looked at the math, and the best annuity around is to increase your monthly paycheck by delaying Social Security.

The book goes into detail on how to determine which methods work best for you. He also offers great advice on to work with a financial advisors, including how to find a qualified one (one takeaway -- credentials can be misleading).

Any investor who is looking to maximize their odds of having money for life should read this book. Vernon delivers on the promise of turning your IRA and 401(k) into a lifetime retirement paycheck. Unlike many books I've read on the subject, he has no outside product or service to peddle and doesn't profit by pushing one method over the other. Reading this book made me feel as though I had a retirement consultant sitting across the table giving me personal advice on how I can have enough money for life.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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