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How to Not Outlive Your Income

/// Posted by Wayne Slattery

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After extensive polling, the number one concern for most retirees is outliving their income. Much of today’s workforce do not have enough to guarantee success in retirement, and a recent study found that the average median savings of millennials is only $8,000—promising that adequate saving for retirement will be a problem for a long time to come. For this reason, and for the struggle I see and work I do on behalf of my clients every day, I wanted to discuss a few factors that can erode retirement designated wealth, as well as pose some solutions.

There are many factors that can lead to outliving your income: longevity, rising healthcare costs, inflation, market decline, and withdrawal percentage. For an average couple, both age 65, there is now a 50% chance that one spouse will live to age 93, and a 25% chance that one spouse may live to age 97! Due to scientific advances in healthcare and a renewed focus on healthy habits, people are living significantly longer than they did just 50 years ago. With such progress in medicine comes higher healthcare costs, which can dramatically affect your assets. Studies have shown that the average out-of-pocket medical expense for a 65-year-old couple is over $400,000 during their retirement years.

Inflation can also play a big role in the erosion of your wealth. Average inflation has been around 3% in recent years, meaning you will likely need to take more and more of your retirement monies each year to be able to maintain the lifestyle you are accustomed to. If you look at the cost of bread, gas, and milk compared to 30 years ago, you will see just how much the cost of goods and services have risen and are likely to continue to do so. Yet few people plan their retirement allocation with such increased spending needs in mind.   

And with such a volatile world and market, potential market declines cannot be overlooked. People who retired during either the “dot-com bubble” in the early 2000’s or the “Global Financial Crisis” of 2007-2008, lost, in many cases, half of the value of their portfolio. Some market experts predict similar market loss events in the years ahead. If you add in withdrawals to these losses, you run the risk of running out of money fairly quickly, even at a modest rate of 4% per year. 

Despite these likely unavoidable eroding factors to your retirement assets, there are possible solutions to take into account. There are three basic stages to retirement: accumulation, distribution, and conservation. Most of the retirement timeline is spent in the accumulation stage, where you put money away into a 401(k)/403b)/IRA and let it grow. The ups and downs during this stage shouldn’t impact your life directly, as you are not accessing the monies yet for income purposes. But when you enter or near retirement and the distribution stage, this is when you’ll need to change the way you have been thinking for the past 35-40 years. 

Having a portion of your wealth guaranteed to, at least, cover standard life expenses is something I recommend for most retirees. But what strategies are available to provide guaranteed income you cannot outlive? For “tax qualified money,” the most common and efficient vehicle is the use of an annuity. There are many types of annuities that serve many different purposes, so I’ll cover two basic types.

A Single Premium Immediate Annuity works like most pensions in that a lump sum of money is given to an insurance company and, based on your age/mortality, they will guarantee you income for as long as you live. You can choose options such as life payments, with a 10-year period guaranteed where the monies will be paid out to your beneficiary if you die before the period is up. You can also elect to cover a spouse if you are to pass first. Both of these options will pay a lower amount than if you just choose income for your life only. There is no liquidity in this option, just the annual income. For some people, the idea of giving up a large portion of their portfolio is a concern, which brings us to another option that I recommend to many of my clients.

A Variable Annuity with a guaranteed living benefit rider can be a great solution to protect against the eroding factors listed above. There are many variations, so I will outline some basic features and how it works in general. Typically, these are used for people near or entering retirement. A 60-year-old couple who don’t want income until 65, and are concerned about outliving their income, can benefit from many features. The ability to lock-in investment gains on an annual basis or receive a 5% simple interest annually can protect your income stream if the market were to drop. While your actual portfolio will reflect the underlying investment performance, the “income base” will grow within these locked-in parameters, and that is what your income is based on when withdrawing. At 65, this couple can begin withdrawals at a rate anywhere between 5%-7.5% of the income base. Once the income flow is started, the insurance company guarantees an income for as long as you and/or your spouse lives. Furthermore, you still own your asset, so if you have an emergency you can dip into the account balance to cover the need. 

This strategy can offset many, if not all, of the eroding factors discussed at the start. We insure our homes, cars, and lives with insurance, but many fail to insure their biggest asset, their retirement income. If you or someone you know would like to learn more about insuring an income you cannot outlive, please contact me to set up a meeting.

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