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Guaranteed Income For Life
As many baby boomers and other retirees contemplate retirement income, they discover many new risks in structuring their investments to produce dependable retirement income. The financial services industry has coined a new term of art, the de-cumulation phase, whereby you are leaving the accumulation phase of growing assets all of your life and transitioning to the draw down phase of balancing the need for income, perhaps with an inflation kicker each year, against the desire to protect principal, and even grow the principal to hedge inflation long term. The desire to leave a legacy for loved ones adds an additional burden and cost to preserving and perhaps growing principal.
New risk factors that cannot be addressed by conventional asset allocation principals now confront the retiree needing dependable retirement income. The first risk factor is “sequence risk” or the variability of returns when retiring at a peak in a market cycle, exactly the wrong time, such as in 2000 to 2003. If you have the misfortune to time retirement at the wrong time, the first few years of poor returns can deflate the expected income stream from an asset and perhaps start a downward spiral of eating into principal until it expires before you do, unless you take a post-retirement pay cut, which few retirees want to contemplate.
A second risk factor is “longevity risk” which is simply defined as the risk of living too long and outliving your money. In the past, retirees longed to terminate full time employment early, at age 62 or younger, only to learn that prior generations may only had lived to age 78 or 82 on average, but today’s retirees are living, longer, more productive and active lives. In fact, a couple age 65 in 2008 has a greater than 50% chance that one spouse will be alive at age 90. For these reasons, retirement projections ought to stress test your wealth to age 100 at a minimum.
Just as social security provides guaranteed monthly income, with an annual cost of living adjustment, except for any future political risk, many retirees want to “put” the dual risks of “frequency and longevity” to a third party by effectively insuring away the risk.
Insuring Your Retirement Income Stream
This shifting of sequence and longevity risk to a third party involves one of two general scenarios, that is, purchasing an immediate annuity by irrevocably allocating principal to a third party insurance company in return for monthly annuity payments for life, life with a period certain, such as 10 years, or period certain payments over a finite period of time, for example 5 years, 10 years, or 20 years. Of course, spouses can be co-annuitants and choose 100% survivor income at the first death or 50% or some actuarial equivalent amount. All payment methods have the same present value and it is important to know that the addition of an additional annuitant will increase the payment liability risk to the insurance company, thereby, lowering the monthly payments to the annuitants. These payment options typically are not indexed for inflation, however, the payments tend to be higher than other alternatives at any given age.
The second method of shifting the risk is to purchase a fixed or variable annuity with living benefits, that is, a rider attached to the policy that promises guaranteed income for life at set withdrawal rates, for example, of 5-6%/yr of the original investment, plus annual step ups in the protected principal amount, if the annuitants elect to defer the receipt of income. For example, a retired couple with a $1,000,000 combined IRA balance, and $300,000 in personal assets, may elect to invest $1,000,000 in a variable annuity, with the potential upside of an intelligent asset allocation model offered by the product manufacturers, and coupled with the living benefits rider of 5%, receive $50,000/yr, or $4,167/month for their joint life expectancies if spousal continuation is elected. If performance is better than 5% net of fees in the future, the payments can increase in retirement to hedge inflation. If performance is less than or equal to the withdrawal amount, net of fees, then the payment stay the same until death. At death, a beneficiary receives any remaining principal, which can be more or less than the original investment.
Please contact us to have your income for life.
The right decision for any retired couple is driven by their own unique facts and circumstances. Nothing in the examples above is to be construed as an offer to give insurance or investment advice and only complete, compliant illustrations, including any prospectus for a variable annuity, can provide the information in more detail. Our retirement income guarantee services are provided on a fee basis to help you determine the best course of action given your own unique circumstances.
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Whether a client has $500,000 or $5,000,000 in liquid assets, it is equally painful to suffer capital losses that can diminish a lifetime of accumulated wealth. As an independent registered investment advisor, Gordon Asset Management, LLC, is uniquely positioned to provide advice on a fee basis with full disclosure and no conflicts of interest. Read More >
