Retirement Puzzle Piece #2
Proper Income Planning for Retirement
Learning Video: Proper Income Planning for Retirement Part 2
OK, you’ve determined your guaranteed lifetime retirement income that will come from Social Security and any pension you are lucky enough to have. As an important sidebar: If you’re married, remember to account for possible reduction in your pension and social security benefits when one of the spouses passes away first.The next step: If your total guaranteed lifetime income equals or exceeds your spending needs which have been adjusted for inflation and longevity, then you’re prepared for retirement without the need of drawing on your retirement assets. However, if the numbers don’t line up then your retirement assets will have to be tapped into. .
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Wall Street has typically followed the 4% rule by advising that to avoid running out of money you should withdraw no more than 4% of your stock and bond portfolio the first year of retirement. You would increase that withdrawal each year by the rate of inflation to maintain your purchasing power. Wall Street says do this, and you’ll have 90% assurance that your savings will last at least 30 years.
But sadly, there are many road bumps that can cause your retirement income plan to go awry. For one, the stock market could take another frightening downturn. Or you could encounter a lost decade of go-nowhere returns like what we’ve had for the first fourteen years of this new millennium.
Research has shown that once a person starts to take withdrawals, the portfolio’s returns during retirement’s early years have a major impact on its sustainability. This is the period when retirees are most exposed to sequence-of-returns risk. If the stock market is bad for the first few years of retirement, you’re going to run out of money much quicker unless you have some system or some plan for addressing that. So, one of the big differences between accumulation and distribution is sequence of returns risk.
Which Assets Provide Guaranteed Lifetime Income?
We know that savings accounts, money market accounts and CDs, are all safe money alternatives. But these choices are currently paying historically low interest rates (basically going broke safely) and offer nothing in the way of lifetime guaranteed income.
We also know that stocks and mutual funds offer potential growth but also subject you to the risk of losing part or all of your principal. And, sometimes these types of investments pay dividends. But again, dividends are not a guaranteed source of lifetime income.
Perhaps you have a portfolio of Real Estate investments that provide income. Unfortunately, such income can be subject to the volatility of the market and offers nothing in the way of a lifetime of guaranteed income.
Next come bonds and bond funds, a choice that Wall Street appears most comfortable with. And, as a result, Wall Street recommends various types of bonds to clients that are looking for stable growth and income in retirement. But let me remind you that bonds and bonds funds (whose yields are also flirting with historical lows) are not income vehicles that provide lifetime guarantees.
Another Alternative for Guaranteed Lifetime Income
And so, there is one other type of investment that is both a guaranteed-money alternative and offers a lifetime of guaranteed income and it comes from the world of deferred annuities.
It’s known as an Index Annuity and it offers guarantees on your principal, reasonable rates of return, diverse liquidity options, and various income options. An Index Annuity, then, is an excellent alternative that should be considered for every retirement portfolio.
And now there’s a new feature with Index Annuities known as the Guaranteed Lifetime Income Benefit Rider. This is a living benefit that guarantees lifetime income and it allows you, the owner of the annuity, to remain in control of your money.
How an Index Annuity with an Income Rider works:
The Income rider has a value that is established at the same time that the annuity is issued. The income rider’s initial value is the same as the initial premium and bonus that’s used to set up the annuity. Income riders normally have two distinct phases: the growth phase and the payout phase.
First, during the growth phase: the income rider is growing in value each year based on what’s called the roll-up rate. Today’s roll-up rate for the income rider value will be in the 7% range and compounded annually.
Then regarding the payout phase: you can access the income rider any time after the first anniversary of the annuity. When you are ready for income, you will have “age based” access to the income rider. The older you are the larger the percentage access to that account.
Once you access the income rider your payout amount is guaranteed to never decrease and it will last for your lifetime. At your death, the Annuity’s accumulated value, less your withdrawals, will pass to your beneficiaries.
This is a Guaranteed Lifetime Income Solution with many features and benefits not offered by any other investment alternative.
The “Three Buckets of Money” Strategy for Financial Peace of Mind
One truth about retirement planning is that you should not put all of your nest egg in one basket. In retirement, you have to live in the here and now. So you need to have income for today. But you also need a plan for retirement income for tomorrow’s inflated costs of living. So one way to allocate assets to meet your retirement income needs is to place your assets into three buckets:
Bucket of Money #1 is for Emergencies:
An emergency constitutes an immediate financial need, such as out-of-pocket expenses for such items as a new roof or new vehicle. My suggestion is to keep adequate emergency funds in a safe financial vehicle such as a savings or money market account so you can get at it at any time.
Bucket of Money #2 is to cover Essentials Expenses
Essential expenses such as food, clothing, mortgage payments, utilities, taxes and health care expenses. According to the U.S. Bureau of Labor Statistics, these essential costs represent more than 86% of the retirement budget for people age 65 and older.
Bucket of Money #3 is to cover Discretionary Expenses
Discretionary expenses include entertainment, travel, hobbies and charitable giving.
So the retirement income strategy here is to ensure that all of your essential living expenses in retirement will be covered by guaranteed income sources, such as Social Security, pensions, and annuities.