Most people want to simplify their finances, not make them more complicated. But planning for 30 years of income is far more complicated than previously thought. It turns out that the “buy-and-forget” portfolio of the old days is no longer the simple solution it once was. The same investment strategy that can get a person to retirement, is often a poor strategy to getting through retirement.
Think about it—previous generations had pensions. Bonds paid 6% to 7%. The average person spent only 15 years in retirement before resting in peace. The math was pretty simple. Income planning was not all that difficult. There were no textbooks on the subject.
Welcome to The New Normal
Today, interest rates on bonds range from 1% to 3% for high quality bonds. The shuffle board and martini’s of the past have been replaced with exercise, better diets, and purified water. People are living into their 90s more frequently.
What is today’s biggest financial risk in retirement? Early depletion of capital. A $1 million portfolio withdrawing the equivalent of 5% ($50,000) annually from 2000 to 2010 could have been drained to less than $250,000 in ten short years due to cyclical bear markets in 2001 and 2008. With 20 more years to go, the problem is obvious. When an investor shifts from contributing to investments and starts withdrawing from them instead, bad things can happen.
Studies reveal that retirees are more concerned with running out of money than any other financial issue. Ten years ago, the greatest fear Americans had was “dying” according to research by Cerulli & Associates, the Boston-based research and consulting firm. Today, retiring Americans state that their biggest fear is running out of money—and being forced into a form of poverty later in life.
How long will your money last? Do you know? You should. Research by a leading USA accounting firm (Ernst & Young) indicates that today’s retirees now face up to a 56% chance of income failure in their lifetimes¹, due to withdrawing against low interest rates, future inflation, and volatile markets. When banks paid 6% and retirements lasted 15 years, planning was easier.
Today, interest rates have been cut in half and retirements have doubled in length.
When banks pay nearly zero, and retirements last more than 30 years, income planning becomes the most important aspect of retirement planning for many. Markets may rise and fall, but income that is reliable, durable, and constant requires planning.
A properly designed income portfolio, incorporating guarantees from legal reserve insurance companies combined with investment growth assets in separate “buckets” can simplify and fortify a retirement portfolio. This is the foundation of the IQ 4 Bucket Retirement System™.
Why Annuity Ladders Are Replacing Bond Ladders
Modern day annuities can pay the equivalent of 5% to 9% income for life. No bond or mutual fund can do that. Certain types of annuities can generate growth, but in general, annuities are at their best when used for their intended purpose: to perpetuate income in retirement. A properly designed annuity strategy can be the practical anti-dote to your 3 biggest risks in retirement: Longevity Risk, Income Shortfall Risk, and Sequence of Returns Risk.
As a younger investor, an annuity strategy may not have been on your “to do” list. At younger ages, optimism for stock market performance for most of us is high. Then, after a few bear markets, reality sets in. In the accumulation phase of retirement most investors to think “tall” rather than “long.” Once retirement hits, and “decumulation” begins, you need income either right away or at a specified date and in a specified amount. You want your money to last a long time and pay you without interruption through up, down, and sideways markets. Bonds are no longer up to the task. Annuities have arrived.
According to Professor David Babble of the Wharton School of Business:
“The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.”
– Professor David Babbel Wharton School of Business, University of Pennsylvania
In the past, bond ladders played an important role in retirement planning. Today, the interest rates on quality bonds is far too low to support a credible retirement plan. Annuity ladders can be more effective.
A bond “ladder” is simply a coordinated and portfolio consisting of bonds with timed maturity dates. Each bond pays interest along the way and then matures. When it matures, the cycle is repeated. Is it kind of a pain? Yes, to be honest. Even when interest rates are high enough to support bond ladders, they are work intensive. For retirees looking to make life easier, do you want more headaches or less as you get older?
A properly designed annuity ladder can provide more income with less work and less worry. At IQ Wealth Management, our expertise lies in designing an income portfolio using top quality annuities from highly rated companies. The annuity “ladder” can pay you ever increasing income to battle inflation at contractually guaranteed rates of income.
To learn how an annuity strategy can add more income to your financial plan with less risk and lower cost, call us today. (888)310-1776. We’ll personally take the time to answer your questions and advise you on your best options.
©Copyright 2014 by Steve Jurich
¹Ernst & Young/Prudential, 2012 “Should Americans Be Insuring Their Incomes?”