How to Never Run Out of Money in Retirement – Even if You Live to 120

August 29, 2021
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“Those who fail to learn from history are condemned to repeat it.”

Henry retired on New Year’s Eve 1999. As an investment banker on Wall Street during an economic boom, he’d spent the previous 10 years working harder than he’d ever thought possible... and getting paid more than he’d ever imagined.

At the age of 58, with several million dollars in “savings,” he decided it was time for a new, more leisurely lifestyle. He hung up his suits, threw out his alarm clock, and began a new life beyond Wall Street.

But his money wasn’t in “savings” at all. He’d put all of his money in the stock market... and concentrated it in several bank stocks, including Lehman Brothers.

Turns out, he had his “savings” invested in the worst possible place—a company that was about to go bankrupt.

In the crash of ’08, Lehman Brothers folded, and Henry lost almost everything. Most of his life savings vanished.

He had to go back to work for a number of years. If he’d put that money into true savings vehicles, where there was no risk of loss, he could have stayed retired.

As you can see, the distinction between savings and investing is a distinction of purpose. But the government and Wall Street has confused the two.  Savings is money earmarked for certain future expenses. Investing is extra money set aside simply to build wealth... after you’ve taken care of your saving and spending. 

Investments will always be subject to loss. The business you invest in could fail (nine out of 10 startups fail). The stock you invest in could go belly up. The stock market could crash, just like it did in 2008.

Your savings, on the other hand, should be very safe. It should be trusted to only the sturdiest possible financial vehicles. There should be no risk that you’ll lose it.

It wasn’t just Henry who made this mistake. Tens, even hundreds of thousands of retirees worldwide made the same one.  And millions are repeating the same error today!

In fact, I’ll bet many of you reading this haven’t yet distinguished between saving and investing—you may have ALL your retirement money invested in vehicles such as 401(k)s and IRAs, or ALL your children’s education expenses in Coverdell or 529 plans.

The Personal Economic Model clearly shows the difference between Investments (Risk) and Savings (Safe). Wall Street has purposely confused these terms.

Almost all of these vehicles are in stock market investments like ETFs, mutual funds or stocks. At least some of this money should also be in savings vehicles. But most savings vehicles today pay negative real rates…and are a drag on portfolio performance.

This is one of the reasons I was drawn to investigate insured assets.  My money is totally safe. That’s because these accounts have no stock market risk. If the Dow crashes 50% tomorrow, my account balance won’t drop a single dime.

Depleting Your Nest Egg

The #1 retirement fear of Americans is running out of money. AARP reports that 50% of Americans share that fear.1

And with good reason, because the average 65-year-old will outlive his or her savings by almost a decade, according to the World Economic Forum. Unfortunately, many will be forced to choose between putting food on the table or paying for life-saving medicine, and may end up being dependent on their children.

We spend our working years hustling to build up our retirement nest egg. We assume that when we retire, we'll supplement Social Security by withdrawing some of the principal. But no one can give us surefire guidance on how much we can safely take from our nest egg each year. In fact, William Sharpe, winner of the 1990 Nobel Prize in Economic Sciences, said retirement income planning is "the hardest and nastiest problem in finance."2

Perhaps you've heard that you'll be safe if you withdraw 4% or 5% of your savings each year, adjusted for inflation.3 But many experts now recommend a maximum annual withdrawal of 3%.4 One financial writer even said, "There are so many variables that it is impossible to calculate a bulletproof withdrawal rate rule – unless that rate is 0%."5

Creating a bulletproof retirement fund distribution plan is not as simple as following some arbitrary percentage rate.

Just a generation ago, folks didn't need to worry about these issues. Up until the 1960s and '70s, employer-sponsored pension plans gave workers a paycheck for life – no matter what the market did or how long the retiree lived.

Today, fewer than one in five American workers have access to a company pension plan, and just 15% participate in one, according to a Bureau of Labor Statistics survey.6

Pensions have become an endangered species. The stock market is unpredictable. Real (inflation-adjusted) interest rates on savings accounts and CDs are negative. And we're all living longer. 

Thankfully, there is a solution that addresses all these concerns.

Generations ago, financial wizzes created a specific financial vehicle to ensure your money lasts as long as you do. It's the vehicle recommended today by the Center for Retirement Research at Boston College and other experts.6

 This financial vehicle is called an annuity. Because it's designed to guarantee you an income no matter how long you live, regardless of what's happening in the market or the economy.

 Retirement savings expert Kimberly Langford, writing for AARP, says,

"One of the most significant risks in retirement is outliving your savings. You can save carefully through the years, but there's a big unknown when you start to withdraw the money: You don't know how long your savings need to last because you don't know how long you'll live.

 "An income annuity can guarantee that you'll receive a check every month for the rest of your life. An annuity can help supplement other sources of guaranteed income, such as Social Security. It can be especially valuable if you don't have a pension. Annuities also help to protect you against stock market turmoil. Your payouts will continue no matter what happens in the stock market or how long you live."7

Annuities are "the only true form of retirement income security: a check that does not stop until one dies." – Dallas Salisbury, President and CEO of the Employee Benefit Research Institute

There are many reasons to own an annuity. The right annuity can – 

  • Give you a competitive rate of growth on your money
  • Offer you ironclad protection against losing your money
  • Provide you with a guaranteed income for life
  • Allow you a way to provide financially for your loved ones
  • Help with the costs of long-term care (in most states).
Marginal estimates suggest that investment assets generate about half of the amount of additional spending as an equal amount of 
wealth held in guaranteed income.
In other words, retirees will spend twice as much each year in retirement if they shift investment assets into guaranteed income wealth.
-Researchers Blanchett and Finke8

Insurance companies have created different types of annuities to meet different needs. Here's a chart to give you an overview of the types: 

Fixed annuities are safe-money annuities. The insurance company guarantees the safety of your money – both your principal and allthe interest you earn. This guarantee is important because the money you need to live on during retirement is money you cannot afford to lose.

I can wholeheartedly recommend fixed annuities for people who want a guaranteed retirement income they cannot outlive. 

Variable annuities are not safe-money annuities. With a variable annuity, you invest your money in sub-accounts designed to mimic mutual funds and stocks. The performance of those sub-accounts determines whether the value of your annuity goes up or down. You assume all the risk of market loss of both growth and principal. Only the death benefit (and the fees) of a variable annuity are guaranteed. If you're going to be in the market anyway, why pay the fees and go through a 'wrapper'?

I cannot in good conscience recommend variable annuities for retirement planning because any risk of market loss is simply unacceptable.

Choosing a Deferred Annuity Based on Whether You Prefer a Fixed Growth Rate... or Growth that Could Potentially Be Much Greater (With NO Risk of Loss)

Deferred annuities earn interest every year. You can choose between two options for how that interest is calculated:

  1. You can choose a deferred annuity that grows by a flat rate every year (called a declared rate annuity).
  2. Or you can choose a deferred annuity that grows by a rate that can change from year to year (called an indexed annuity).

 Both declared rate and indexed annuities are safe-money annuities. The difference is how the insurance company calculates how much interest to pay you each year. Here's how that works...

How the interest you earn is calculated in a fixed declared rate annuity

With a fixed declared rate annuity, the insurance company guarantees your account will grow each year by a specific percentage until the annuity reaches maturity. You choose the maturity date when you open the annuity. The date can be in a couple of years, five or ten years, or even longer.

A fixed declared rate annuity grows the same way a certificate of deposit grows, except that the annuity will typically guarantee a higher rate than a CD, all else being equal. And an annuity offers tax advantages and other advantages that a CD doesn't.

How the interest you earn is calculated in a fixed indexed annuity

Fixed indexed annuities allow you to grow your annuity based on the performance of a market index, such as the S&P 500. But you don't have the risk you'd have if your money were actually invested in the market. This is NOT an indexed fund.  It is indexed to the market; but not invested in the market...big difference.

With a fixed indexed annuity, you have the potential for growth that's tied to an index's positive performance. (This growth can be much greater than growth you'd receive in a fixed declared rate annuity.) But you also have the potential for no growth at all in years the index performs poorly.

With a fixed indexed annuity, you can choose from an assortment of indexes. You can mix and match. And you can change the indexes you track from one year to the next.

In a fixed indexed annuity, if the index you've chosen goes up in a given year, you get a portion or all of the index's growth. The insurance company adds this growth to your annuity's contract value and locks in the increase. You cannot lose it later due to poor market performance.

In years when the index is down, your annuity may not grow, but you will never have a loss. Once credited to your annuity's contract value, your principal and growth are locked in. The safety of your principal and interest are guaranteed, even though your gains are linked to a market index's performance. This guarantee is the power of fixed indexed annuities.

Fixed indexed annuities offer principal protection, guaranteed income, and the opportunity to benefit from market gains – with no downside risk! And almost all fixed annuities give you the ability to access some of your contract value even before you start taking a regular income from it.

Traditionally, investors have steered clear of guaranteed lifetime income annuities because of concerns over lack of:

  • liquidity

  • inflation hedge

  • death benefit feature.

 The insurance industry has done an admirable job creating a tool that addresses these concerns in a way that satisfies the average consumer.

By building a 10 percent penalty-free withdrawal into the FIA, they assuage concerns over lack of liquidity.

Furthermore, because the guaranteed income stream is linked to the growth of a stock market index, you have ample opportunity to keep pace with inflation.

Lastly, the FIA’s death benefit feature gives you the luxury of dying without disinheriting your beneficiaries. 

There is no other financial product that combines all these benefits, so you can see how a fixed indexed annuity can make sense for people with different needs. 

Which should you choose: a fixed declared rate annuity or a fixed indexed annuity?

Many people like having the potential for greater growth that a fixed indexed annuity provides and are willing to risk some years of zero growth for two reasons:

  • You have the potential for greater growth than a fixed declared rate annuity gives you.
  • The insurance company guarantees that your principal and your gains are locked in, so you never go backward.

To find out if an annuity or other safe wealth-building strategy makes sense for your situation, take advantage of a free, no-obligation consultation.  Every lifetime income strategy is custom tailored, and no two are alike. Yours would be based on your unique situation, goals and dreams.
To find out how you could enjoy an income stream guaranteed to last as long as you live, request a FREE, no-obligation Lifetime Income Consultation

 

1 https://www.aarp.org/retirement/planning-for-retirement/info-2019/retirees-fear-losing-money.html, citing research by the Aegon Center for Longevity

2 https://www.forbes.com/sites/robertpagliarini/2020/01/22/the-stunning-problem-with-the-4-retirement- income-rule-in-one-chart/?sh=25f407d021cb

3 https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last

4 https://www.thebalance.com/how-much-can-you-withdraw-from-your-retirement-portfolio-4539975 https://www.financialsamurai.com/the-ideal-withdrawal-rate-for-retirement-doesnt-touch-principal/

 5 https://www.aarp.org/retirement/retirement-savings/info-2020/longevity-annuities-explained.html

 6 https://crr.bc.edu/briefs/how-can-we-realize-the-value-that-annuities-offer-in-a-401k-world/

7 https://www.aarp.org/retirement/retirement-savings/info-2020/longevity-annuities-explained.html

8 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3875802