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Guaranteeing Retirement Income

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Getting pre-retirees to view their retirement savings as a monthly paycheck is an uphill battle.  As millions of Baby Boomers head toward retirement, they will have to figure out the cash flow challenge of retirement living.  As their goals shift from building wealth to generating stable income, “Retirement income distribution planning” as a key goal for pre-retirees.

Retirement is one stage in life where you don’t want to have to guess the availability of income to meet your needs. You would like your retirement corpus to not only generate an income to meet your needs but also to meet those retirement dreams that you have nurtured for years. However, all income is subject to risks.

There are significant risks to consider when it comes to assuring financial security in retirement: There is the risk of outliving one’s assets—also known as longevity risk.  This ranks right up there with Market risk, as we know, markets don’t move in straight lines, when you take distributions, the funds are gone.  Average returns don’t take that into consideration.

Your first priority when structuring your retirement portfolio must be to secure a level of income that is adequate to meet basic living expenses.  A Defined Benefit (DB) plan promises a certain level of income during retirement, usually based on an individual’s salary and years of service when he or she retires.

This highlights that the shift away from defined benefit pensions to defined contribution plans has transferred the responsibility for managing longevity risk, along with investment and inflation risk, to the individual.  Your post-retirement income also needs to be predictable to an extent to match your expenses. So, to build in predictability of income you will need to look at fixed income products.

An annuity can be a source of steady and substantial income. Here’s a sense of how much you might get from an immediate annuity: For $100,000, a 65-year-old man could start receiving about $563 per month for the rest of his life. That’s about $6,750 per year. It may not seem like much, but imagine that you have $300,000 with which to buy an annuity. That could generate almost $1,700 per month, or more than $20,000 per year.

Add that to Social Security, which recently paid average monthly benefits of $1,337, or about $16,000 per year, and it can be quite a powerful support in retirement. (Of course, depending on your earnings history, your monthly Social Security benefit may be significantly higher or lower.)

There’s a lot more to immediate annuities. For example, you can customize them according to your needs or preferences. By paying more (or receiving less), you can have the payments increase along with inflation over time. You can also have the payments continue not only to the end of your life, but to the end of your spouse’s, too.

A safe option is to look into locking in a guaranteed lifetime income you can’t outlive.  You see, there is insurance for longevity risk: insurance companies which are among the world’s largest, strongest and oldest financial institutions are willing to guarantee you a lifetime income you can’t outlive if you’ll deposit with them some of your retirement money.

They will take the risk associated with the markets, stocks losing value, real estate crashing and other unforeseeable developments that can erase your retirement money.  You, on the other hand, got protection from your most feared risk in retirement: outliving your money.

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Tuesday, October 27th, 2015 Wealth Management

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