In Retirement, One of Two Things Will Happen!

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Published August 27, 2012

You either outlive your money or your money outlives you. There are several factors that will determine whether your money will last for the rest of your life or not. There are also several ways to protect yourself from going broke in retirement.

What factors determine your retirement success? While there could be many different factors that may have an impact, I believe it comes down to the following three.

1.  How long will your retirement last? In other words, how long will you live?
A husband and wife walk into my office and are ready to retire. They are both 62 years old, the average retirement age today.

Say I ask them the following question: “If one of you passes away, at what age do you think the surviving spouse will die?” What would be their answer? 77? 80? 90? Statistics show the correct answer is age 92. I am willing to bet that you thought of a number lower than age 92. In fact, when asked this same question, four out of five people will respond with a number lower than 92. Most people don’t think they will live that long. But that just isn’t the case. The number of people still living at age 100 has nearly doubled in the last 20 years.

So, if the average retirement age is 62 and at least one spouse will live until age 92 that means the average couple will have a 30-year retirement. Will your money last 30 years? You better hope it does. Or better yet, you better make sure it does.

If you are going to live for 30 years in retirement there’s another landmine you need to be aware of. INFLATION! Do you remember how much it cost to put gas in your car, mail a letter, and buy a movie ticket or a gallon of milk 30 years ago? Every year, everything you need to buy will cost more. Sure, you could be debt free. No mortgage, no car payment, and no credit cards. That is great. But there’s a difference between debt and expenses.

Debt can be paid off. Expenses can never be paid off. You still have to pay the electric bill, pay for groceries, and fill your car up with gas. These expenses will continue to rise during retirement and there’s nothing we can do about it. If your expenses rise, shouldn’t your income rise too? This is where I believe most advisors run into challenges when creating a retirement distribution plan for their clients. Most advisors solve for an income stream that will satisfy your needs in today’s dollars but never show you how your income can grow to keep pace with inflation. There are solutions.

2.  How much will you withdraw from your nest egg?
You may have heard it before. When you retire, take 4% from your nest egg and with a properly allocated portfolio you should never run out of money. But where did this figure come from?

There have been many studies done on the subject. The 3 most famous are the Bengen, Trinity, and the Harvard studies. All of them came back with roughly the same figure: 4%. There’s only one problem. It’s called the sequence of returns risk.

If you happen to start taking withdrawals from your retirement savings during a bear market where there are negative returns, you will have a much greater probability of running out of money in retirement. Conversely, if you happen to start taking withdrawals during a bull market where you will enjoy positive returns in the early years of your withdrawals, your money will last a much longer time.

The problem is we can’t predict whether we will be in a bear market, bull market, or flat market when we start taking these necessary withdrawals.

3.  How do you protect yourself from substantial market declines?
It’s inevitable. The market will decline at some point again in the future. It just simply doesn’t go up every year. How will you and your retirement savings be affected? Assuming you are going to have a 30-year retirement, how do we create a portfolio that will have growth potential to keep up with inflation while protecting the client from a catastrophic decline in the market? It’s one of the biggest challenges that I face as a financial planner.

In my opinion, the answer is to insure your investment. We insure other valuable assets like our homes and our cars.  Shouldn’t you also insure your retirement nest egg as well?  This can be done with an annuity that offers a guaranteed lifetime income benefit rider. There are many types of annuities. The one I am referring to is an index annuity. An index annuity’s performance is based on the performance of a particular market index such as the S&P 500.

Depending on the annuity and the crediting method, when the market has a positive performance, the index annuity’s account value will participate in a portion or all of those gains. When the performance of that index declines, the annuity’s value will NOT decline, thus protecting you against a possible catastrophic decline in the market. Most insurance companies that offer these annuities will also offer some sort of rider that will guarantee an income stream for life—even if your account value goes to zero.   There are even a handful of companies whose riders not only guarantee the income stream for life but also guarantee a cost of living adjustment on the income. This will help you keep pace with inflation in retirement years.

Yes, these riders cost an additional fee, and you, as a retiree, will have to determine if those fees are worth the guarantee. I believe they are. I would recommend you meet with an independent advisor who has the ability to offer many different annuities with access to many different insurance companies. Depending on your particular situation, one company’s annuity and subsequent rider guarantee may be a better fit than another. Do your homework and compare the various options available.

With some careful planning and some good advice, I believe you can have an enjoyable and worry free retirement.

* Index annuities are an insurance product offered by insurance companies. Investors should carefully consider the investment objectives and risks as well as charges and expenses of an annuity before investing. To obtain any disclosure documents, contact your Financial Advisor. Read the disclosure documents carefully before investing.

For more information on preparing your finances for the future, contact Philip Detlefs from Investment Management Group at (904) 731-9955 or email Philip at philip@plansmart.net. As a financial planner, Philip, is licensed to sell insurance products in the state of Florida through various carriers. Philip is also an Investment Advisor Representative offering securities and advisory services through Veritrust Financial, LLC, a broker-dealer and SEC Registered Investment Advisor firm, member FINRA/SIPC. Investment Management Group and Veritrust Financial, LLC are unaffiliated entities.

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