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Retirement Income Management


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To enjoy a comfortable retirement lifestyle, you’ll need to have adequate financial resources in place. And that means you must plan for the expected — but prepare for the unexpected.  You also need to know that your money will be there for you as you need it during retirement.

Knowing that, you’ll then have to figure out how much you can withdraw each year. This is a complex decision that must take into account a number of factors including your life expectancy, risk tolerance and asset allocation. Of course, your choice of withdrawal sum will have a significant impact on how long your money will last.

If your investments are going to provide a significant part of your retirement income, you need to carefully manage annual withdrawals from your portfolio. Your withdrawal rate plays the biggest role in determining the sustainability of your spending strategy. In other words, it is key in helping to ensure your portfolio provides for your needs as long as you need it.

You can avoid or minimize your danger of overspending in retirement by doing some thorough thinking and planning well before you retire. Perhaps start with the widely promoted 4% withdrawal rule, which suggests that you withdraw 4% of your nest egg in your first year of retirement, and then another 4% each year thereafter, adjusting the 4% for inflation.

That withdrawal rate is designed to make your money last. You can use the rate to estimate the nest egg you’ll need in retirement by multiplying your desired annual income stream by 25. So, for example, if you’re looking for $15,000 annually to supplement your Social Security income, you’d multiply that by 25 and would get $375,000. (Four percent of $375,000 is $15,000.)

It is critical to prepare for unexpected market declines, as this can affect the health of your portfolio and can also affect your ongoing withdrawal rate. It is important to either budget for this by being more flexible with spending (and possibly withdrawing less) or consider insuring against this risk by using an immediate life annuity to provide you with a guaranteed income stream.

How long you can expect to live is somewhat of a mystery. If you were to live longer than you anticipated, would you be financially prepared? To help make sure your money lasts throughout your lifetime, you may need to consider investments that can provide you with a lifetime income stream. And your longevity will obviously also affect your annual portfolio withdrawal rate.

Even the U.S. Treasury encourages annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes.

Here are a few benefits of annuities not offered by other investments:

• Guaranteed Income for Life – even if annuity value falls to zero,
• Creditor Protection – if you get sued you can’t lose your annuity
• Guaranteed Increases in your future income,
• Tax-Deferral – can help reduce income-tax on social security and Medicare Part B premiums,
• Control of when, and how much income you want,
• Tax-free fund exchanges,
• Free from Probate – pass directly to beneficiaries at death without the cost, delays and publicity of Probate,
• Safety – Backed 100% by issuing companies,
• Liquidity – offer 10-12% annual free withdrawals offering immediate liquidity,
• Annuitization can eliminate need for RMDs,
• Long-Term Care riders
• Backed by state insurance departments

With a fixed annuity, you pay a sum up front and, in return, receive a fixed monthly payment for life, providing you with a reliable stream of income you can’t outlive. This may make sense if you’re seeking income now or if you want a known income stream that won’t be affected by market fluctuations

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Wednesday, August 26th, 2015 Wealth Management

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