Retirement Planning in the New Normal

By Jack Albertson Features

In November 2007, “Bill” is getting ready to retire. After a severe downturn in his portfolio in 2000, 2001, and 2002, Bill has finally recovered most losses. He is confident that with the $2.5 million 401K he’s worked hard to build up, he can retire a year from now on his 65th birthday, and he and his wife will finally enjoy the dreams and visions he’s nurtured for decades.  His day comes, and now on November 20, 2008, he checks his portfolio to discover that his flourishing account, which a little more than a year ago stood proudly at $2.5 million, now squats humbly at $1.2 million. Is it back to work, or do Bill and his wife dash most of those dreams and retire anyway?

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Like Bill, most of us are avoiding further losses and getting out of the risk of the market rather than waiting, maybe another decade, in this up and down market environment until maybe we can recover. But the monies we spend once we are in retirement can’t be recovered!  And you are worn out worrying about it.

Prudent planning going into retirement would dictate that a healthy percentage of your portfolio be moved to fixed investments as you age. However, when you walk out of the bank stunned by the dismal returns offered in CD’s, Money Markets and Savings accounts, then consider the risk associated with the bond markets offering better--but not inflation–fighting--returns, you throw your arms up in disgust, fear, and panic. Social Security offers some refuge, until the latest political speech scares you into thinking it will be taken away, which this planner thinks will never happen. All things may fail, but after half of Washington is sent home, the last thing they’ll do will be to cut Social Security.  You and I may experience fewer cost-of-living adjustments in the future, but mark my words; you will always have social security, despite the fear tactic that is so well-used in debates.

The solution for Bill and many others in retirement is a well-constructed fixed indexed annuity, with a guaranteed income rider.  Let’s look at what Bill could have done as late as one year before retirement. Based on current offerings at the time of this writing, he could have taken his $2.5 million and been given a 10% bonus at time of contract, making the value $2,750,000. He then would have taken a guaranteed increase of 7% of his income value every year until he starts guaranteed income, or, at 65, take a guaranteed income for life of (5%)  $147,125 annually, even if he lives to 120! If he should die prematurely, his heirs would receive his account value, including the 10% upfront bonus, less what he has taken out and a fee of 0.06% per year (that’s 6 tenths of a percent per year) to guarantee his income, even if he runs out of account value.  That’s called security. That’s called planning!

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