When it comes to retirement income, many people struggle with balancing spend in street risk with that of running out of money. It’s been well chronicled that many people are faced with running out of money during their retirement years. I have made some people where a strategy that takes running out of money off the table, but they struggle with it because of spending spree risk.
Retirement income and longevity risk
The biggest challenge in retirement income planning is longevity. If you die the day after you retire then you will not have run out of money. Sadly, I have seen that happen with my family members. On the other hand, you may live until over 90 years of age. I have seen this happen too in my family. Pensions and Social Security, which is pension like in providing ongoing income, are ways to address the problem of running out of money.
Running out of money is not the same as having an enough money as one ages (running out of enough money). For example, I had a client who qualified for a $75,000 a year pension and retirement. The problem was that $75,000 would be the same 30 years later. At the time, we 1st talked, he was 62 and his mother was about 92. The purchasing power of $75,000 would not be the same in 30 years if there was inflation. Let’s assume a 3% inflation rate. That would require $75,000 to be $182,044 in 30 years.
Retirement income and spending spree risk
If you’re like my buddy, let’s call him Bill, you don’t have a pension. One day I was talking to Bill and he lamented the fact that he did not have a pension. I told him that he could and briefly explained he could buy a single premium immediate fixed annuity (SPIA). This type of fixed annuity can be purchased to provide you with income for life. Even better, you can add a cost-of-living adjustment increase. One of my clients purchase one with a 3% annual increase for life.
Bill didn’t like it because he would have to see money in his bank account transferred to an insurance company who would guarantee this lifetime payout. If you are unfamiliar with insurance company law, they are regulated to have certain reserves to help them not become insolvent. There’s also an insurance/reserve account and all insurance companies pay into to further mitigate the risk of policyholders being harmed by one insurance company’s insolvency.
Did I also mention creditor protection?
He said no to further evaluating the benefits of a SPIA. He cited, “what if there is something I would like to do with the money and he couldn’t?” That a similar logic saying that I can’t say because there are other things that I want to do with my money. He continues to ask me on an ongoing basis what I think about his accounts and the fact that they are draining faster than he can replenish them.
Retirement income and what’s next
There are many different strategies being discussed for retirement income planning. Some people hold that they’re able to generate enough interest on the money that they can just live on the interest. People like David Blanchet, head of retirement research at Morningstar Investment Management LLC, Wade Pfau, Director of Retirement Research at McLean Asset Management and others have advanced different strategies. I’m challenged with using them because they’re typically complex and rely on certain assumptions to work. For years, many in the investment world had relied on the 4% withdrawal rule is being a sustainable spending rate. However, the market downturn of 2008, showed that those assumptions weren’t flawed.
My parents benefited from having a pension and know nothing of a 401(k), IRA, or retirement income strategies designed with not running out of money in mind. They don’t even use the term retirement income. Most people I want a simple strategy like the one a single premium immediate annuity provides. Is this a strategy you need to want to learn more about? I believe by working with an empathetic CERTIFIED FINANCIAL PLANNERTM professional you can find a balance between the desire to spend and the probability of running out of enough money. Ready to learn more about our personalized, on-on-one advice?
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Riders, like cost of living increase adjustments, are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.