Guaranteeing Retirement Income

A recent survey indicated that the vast majority of American’s between 55 and 75 would like to have a guaranteed lifetime income in addition to their social security. This study conducted by Greenwald and Associates included 1,105 consumers with investable assets of at least $100,000.


The survey found that there was an increasing concerns about the ability to maintain a standard of living during retirement and the fact that more and more need to take higher investment risks in order to meet their retirement income needs with attended worries of investment losses.


Adjusting ones discretionary spending during retirement if needed, can always be done. However, it is incredibly comforting to know that one’s essential expenses will be covered by a source of income that will not run out.


As one gets closer to retirement or, in fact is already in retirement, the need for growth of assets becomes less, while the need for protected guaranteed income becomes greater.


Even though the appeal of lifetime guaranteed income is clear in this study, one has to ask, why are so many retiree’s reluctant to seek out and understand annuities, even though they can provide a protected regular income for as long as one lives.

It appears that the complexity and perceived cost of annuities outweighs the advantages. Unfortunately, there are several misunderstandings such as, cost and fees.  When one thinks that an annuity is too expensive, the question should be compared to what?  What you are paying for is the guarantee, protection, and safety of knowing that regardless of what happens with your other investments, you will always have a guaranteed income during retirement, for as long as you live.  There is nothing else that exists similar to this.


When viewing ones retirement, it is critically important to ask yourself:


How much guaranteed lifetime income do I have?

Have I taken the key retirement risks off of the table?


The retirement risks are:

Inflation, which is one of the biggest factors that can affect the income received during retirement.Deflation, which is triggered by a decline in the overall level of growth in the economy.Withdrawal rate, the amount of money needed to be withdrawn from your retirement savings, which one must then factor in lifespan in order to make sure you do not outlive your money and can continue to live comfortably. The 4% rule is nothing more than a rule of thumb to determine how much of your money can be withdrawn each year during retirement, and not run out of money. Today, it is believed that the 4% rule is not efficient. 2.8% is now being touted as the proper withdrawal rate. This is due to the extremely low interest rate environment we have been in, as well as people living longer.Order of returns. We all are quite aware of how quickly the stock market can turn, especially if we had stocks 2008. What is interesting about average rates of return over time is that, on the day you retire and begin taking money out of your portfolio, those average market returns have very little to do with how long you will be able to pull money from your portfolio. What matters is what happens in the first 1-5 years prior to and after you retire, which will determine how long your money will last.Longevity. We all know people are living longer, which in essence is a good thing however, when it comes to stretching retirement income, longevity can cause concerns as income must last for a much longer period of time.

Longevity isn’t’ just a risk in and of itself, as it is truly a multiplier of all of the other risks. Longevity has the potential to stretch out all of the other risks for a much longer period of time.


When planning for longevity, many financial professionals use age 85 to 90 as the maximum age for retirement income. I do not believe this is a correct age.  As a matter of fact 33% of men and 44% of women will live beyond age 90, and 63% of all married couples will have at least one of them living beyond age 90.  The probability for a female living beyond age 94 is 25%, and for one spouse, age 97.


When one reaches retirement, accumulation should no longer be the driving force. Using a systematic withdrawal from a diversified portfolio or bond ladders to provide retirement income will create a greater market risk, interest rate risk, withdrawal risk, order of return risk, and most significantly, longevity risk.  A financial research corporation through their studies have proven that even a well-constructed moderate portfolio is likely to fail over the long term if investors get aggressive with withdrawal rates, as most will.  As we discussed above, today’s aggressiveness may be as little as a 4% withdrawal rate!


The simplest question to ask yourself is how much of your portfolio are you willing to lose? In other words, what percentage in the next downturn are you willing to give up?  Remember that it is much harder to replace what you have lost then not to lose it at all.


What most people do not realize is how an income annuity can offer high cash flows, especially since they are nothing more than an insurance product. Most interesting is that these products provide investors with a type of alpha that a traditional investment is unable to match, longevity credits, also known as mortality credits.  It is these credits that will separate income annuities from any other investment options within the fixed income market.


The cash flow from an income annuity is derived from the following sources: 1) interest, 2) a return of principal, and 3) mortality credits. As we know, traditional investments usually offer two of these components, interest and return of principal through a portfolio of bonds.  It is the mortality credits which provide the needed additional cash flow.


These mortality credits are derived from the mortality pool built into income annuities. Since an insurance company sells annuities to thousands of investors, we know that some will die early, and some will die later.  When applying the principal from those who die early to those who die late, the insurance company can guarantee a higher, lifelong payout to everyone, no matter how long they live.


The amount of income that a retiree will receive during his retirement years is paramount to how likely he or she will succeed. Even though in the past, withdrawing 4% of one’s portfolio has worked, today a lower rate could still be successful as long as it produces enough income for the retiree to be comfortable.  A higher rate will definitely increase the risk of failure.


Annuities can offer guaranteed protected income, security during your retirement years, the knowledge that even if the financial markets experience a serious setback, it will not affect your protected guaranteed income.

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