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Understand Deferred Income Annuities

Deferred Income AnnuitiesDeferred Income Annuities, also known as Longevity Insurance Guarantees and Lifetime Income Guarantee Contracts, have several acronyms- DIA’s, LIG, or just Longevity Insurance.  They are an exciting evolution of the most traditional form of annuity, the Immediate Annuity.

With a Single Premium Immediate Annuity, or SPIA, you buy lifetime income that starts immediately, and generally do so with the payment of a single premium amount.  These types of annuities are explored in the Immediate Annuity Pages.

By contrast, a Deferred Income Annuity offers all the benefits of longevity protection and lifetime income, but it does it in a more efficient way by deferring the start date of the income stream.

Benefit

A few of the main benefits of Deferred Income Annuities are:

  • Build safety around your entire portfolio by eliminating the risk of outliving your money.
  • Plan effectively with the rest of your assets when the single biggest unknown is solved.
  • Cream off the best of the best that the Insurance Company can offer- Mortality Credits.
  • In a low rate world, your payout on a Deferred Income Annuity can be tremendous.

Who It’s Right For

The primary benefit from a Deferred Income Annuity is a high, guaranteed, lifetime payout.

Therefore, the perfect buyer for these types of payments is a relatively young (40’s to 50’s) aged, healthy individual or couple who have a high expectation of longevity.

It’s also perfect for relative affluent people for whom the premium is a small percentage of their assets.  It allows them to enjoy a higher standard of living and spend down their money confidently.

Quite simply, annuitization of assets- meaning, turning your assets into the maximum possible spendable lifetime income at the lowest risk- is mathematically proven to be only possible by using income annuities.

And a deferred income annuity skims off the absolute best a carrier has to offer.

Who Should Not Consider This Annuity

The major disadvantage of a pure longevity income insurance policy is that when you pass away, any unrecovered principal is surrendered to the insurance company.

Now, there are ways to structure the contract to continue payments in your absence, give us a call for more.

But those who can not afford to support themselves prior to the start of income from a DIA policy, or those who do not believe they will live well into their 90’s, may not find the risk of living too long to be worth the price of giving up a portion of their assets  long in advance.

How To Buy

To get started with deferred income annuities, give us a call.  We will generate current market quotes based on your age and discuss your income needs to see if they are appropriate for you.

Private Pension Series Recap

Over the past several weeks we’ve taken an up-close look at how pension income is the central core of a retirement income plan.  The purpose of the series is to highlight the important considerations to address when crafting a private pension plan of your own to convert a lifetime of savings into an income stream that will fully sustain you in the years ahead.

I’d like to revisit the main points of this series before getting we jump into into the specific proactive step.  So, here’s a snapshot of what we covered based on excerpts from the series.

Part I:  The Value of Pensions

Why is a pension such a good thing?

Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement.  Now there are several challenges to contend with that will decrease the power of that cash flow but that’s precisely the overriding benefit.  A stable base of income will allow more flexibility with other assets so you can focus more on growth to provide adequate funds for any obstacle you meet in the future.

The importance of guaranteed income is further reinforced when you take into consideration the various challenges that make retirement planning difficult.  So we continued with…

Part II:  Financial Threats in Retirement

The intention here was to outline the issues that will threaten a poorly crafted plan.  When working to plan for longevity risk, market volatility and inflation the actions you take now must be calculated and deliberate for the following reasons…

No one knows how long each of us will live which makes it difficult if not impossible to determine appropriate spending levels.  No one wants retirement income to be subject to the whims of Wall Street.  No one has a clue what a dollar will buy in 20 or 30 years.  That’s why everyone needs and should want a stream of guaranteed lifetime income.  The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

The importance of planning for these threats is apparent and traditional asset management has long been considered to be capable of meeting the challenge.  In the name of prudent decision making, a closer examination of that line of thinking is mandatory, which led us to the following post.

 

Part III:  Tradition Asset Management Doesn’t Work for Retirement Income Planning

I’ll never ask you to take my word for it.  In this installment several studies were offered as a reference that allowed me to conclude with this statement:

The biggest problem to this [Traditional Asset Management] approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely longevity risk, market volatility and inflation.  It all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.  If you had a choice, when would you like your retirement income to be reduced?  I vote never.  I’ll repeat myself; the traditional approach to retirement income planning has absolutely no guarantee of success.

There is a stark contrast between the methodologies, risks and benefits of asset management and income planning that denotes a necessity to approach each of those targets from a different angle.  That led us to the solution in the next post.

Part IV:  The Pension and Annuity Answer

Again, several academic studies were provided to give you a solid base of knowledge to use in this important decision making process.  Here’s what they had to say:

These studies combined speak directly to the central point of The Pension Series which highlights the benefits and necessity of guaranteed income.  In essence, cover your basic expenses with a source of guaranteed income you can’t outlive.  Annuities allow you to do that more efficiently than any other asset class which allows you to allocate additional assets to optimize portfolio growth over time.  Continued portfolio growth gives you the flexibility to ride out market corrections and makes additional funds available to provide for financial emergency or future inflation.

That brings us right back to the beginning where we looked at the variety of benefits you will receive after securing a source of guaranteed lifetime income… stable cash flow through retirement, flexibility and growth with additional assets.  It’s not only the safest route to take but also the most profitable.

The Next Step: Design Your Own Private Pension

Now it’s time to find the most efficient source of income for your situation.  It’s never as simple just picking a product.  There are a wide array of considerations that need to be made for your specific situation.  This is a serious task that takes more time and consideration than a 'product salesman' can offer.  In the next post I’ll detail those considerations so you can get started on the path to long-term security.

Be on the lookout tomorrow for a set of guidelines you’ll want to follow when designing your private pension.

Thanks for your time… have a great day!

Bryan J. Anderson

800.438.5121 [email protected]

Financial Threats In Retirement

Welcome back to the second installment in the pension income series where I plan to name the threats to your portfolio while drawing retirement income.  It is very important to understand the various challenges you’ll face over the long run and plan accordingly so your retirement years are smooth sailing.  For the most part these are things you already understand but haven’t yet figured out how to check them off the list.

Last week this series began with a brief introduction to the value of pension income- a steady, guaranteed stream of cash flow through retirement.  Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about this week. 

Any of these individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.  If you are just joining us follow the link at the top of the page to read last week’s post.

Without further ado, here we go… The biggest challenges to maintaining a certain standard of living in retirement are longevity risk, market volatility and inflation.  Sounds like a nasty list, doesn’t it?  Recognizing the problem is the first step and the first step is always the hardest.

Longevity Risk- Of all the ways this can be defined, in regards to you and retirement income, longevity risk simply refers to the risk of outliving your assets.  While this could be the scariest issue of all it is probably the easiest to problem to solve and will lessen the impact of all other threats.  This directly relates to last week; if you have guaranteed lifetime income you know you’ll never outlive a paycheck.  As I wrote last week, “without guaranteed income, you could be relegated to constant worry over appropriate spending levels.”  Negative investment performance could be devastating to your lifestyle, but can be eliminated by a guaranteed source of income.

Market Volatility Risk- Market volatility can mean the difference between a happy retirement and a stressful retirement.  Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement.  One IRA statement I reviewed the other day showed a meager 1.76% annual yield after more than 20 years of saving and investing.  This is dismal performance, especially when it’s just a few years from retirement.

In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets.  How do you escape this trap?  Guaranteed lifetime income.  Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels.  When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.
 
Inflation Risk- This one is tricky.  As they say, a dollar just won’t buy what it used to.  Now I don’t care what anyone says, there is no action you can take today that will protect you from inflation tomorrow.  Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets.  In economic circles that is called lost opportunity cost.  The key to beating or at least mitigating inflation is to remain flexible.  Lock in what you need now and let your money grow for tomorrow so it is available to provide what you need in the future.

This all fits together and comes back to one simple theme:  guaranteed income protects you and allows you a choice in retirement.  No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels.  No one wants retirement income to be subject to the whims of Wall Street.  No one has a clue what a dollar will buy in 20 or 30 years.  That’s why everyone needs and should want a stream of guaranteed lifetime income.  The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

In the next part of this series I’ll examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution.  It’s time to unlearn everything you’ve been taught.
 
Thank you and have a great week!
 
Bryan J. Anderson
800.438.5121

[email protected]

 

The Value of Pensions

Over the next several weeks I plan to roll out a sequence of emails that, when finished, will represent a new section of the website meant to help individuals design a retirement income strategy from the privacy of home. We’re going to call it the AST Private Pension Center. The goal is to show the value of using various types of product allocation to achieve maximum financial output through retirement. 
 
Plenty of academic studies have been done that can be pieced together to provide mathematic, scientific and economic facts to support the conclusions of the process. It’s my job to bring all the relevant information to one place for your benefit.
 
For starters, let’s talk about the value of pensions. As time passes, fewer people receive the benefit of an employer pension and those that do still exist are rarely able to meet the needs of retirees. True defined benefit pension plans have slowly been phased out over the last few decades in favor of defined contribution pensions, which are mostly comprised of 401K and IRA accounts. This shouldn’t be news to anyone.
 
Where retirees of yesteryear could rely on a former employer to issue a guaranteed income for life, the tables have turned and now put the responsibility of retirement funding squarely on the shoulders of the individual. In the new age of trimming expenses to maximize share values, pension liabilities were simply too expensive to keep on the balance sheet.
 
The expense to corporations of carrying pension liabilities denotes a direct indication of the underlying value of a guaranteed income stream. Honestly, without a pension, how do you know whether you’ll have enough money?
 
Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement. Now there are several challenges to contend with that will decrease the power of that cash flow but that’s precisely the overriding benefit. A stable base of income will allow more flexibility with other assets so you can focus more on growth to provide adequate funds for any financial obstacle you meet in the future.
 
Without guaranteed income you may well be relegated to constant worry over appropriate spending levels. Negative investment performance could potentially cause a major lifestyle change and the use of bonds or similar vehicles to preserve assets may not achieve the growth targets necessary for optimal performance or future cash flow.
 
The absence of pension-like income leaves far too many unanswered questions. And the biggest question is without a doubt how long you’ll live, also known as the risk of longevity. Since no one knows for sure how long each of us will live, it’s impossible to determine a sustainable spending rate without a portion of assets being dedicated to a lifetime stream of income.
 
Let’s recap this brief introduction to the value pensions…
 
The majority of current and future retirees are personally responsible for income in retirement. Because of the various challenges including longevity risk, inflation and market volatility, a guaranteed base of lifetime retirement income is essential to creating an adequate plan. Pension income will give you the flexibility with remaining assets to pursue the market growth needed to provide future funding sources to take care of any challenges that arise.
 
Next week I’ll continue with the next email in this sequence that is intended to name the threats to your retirement portfolio and how pensions will provide the benefits needed to financially rise above any future challenge you’ll face.
 
Stay tuned for the next email in this series and thanks again for your continued loyalty.
 
Have a great week!
 
Bryan J. Anderson
800.438.5121 [email protected]

Federally Issued Inflation Adjusted Annuity

indexMy mind was filled with negative images before I even got the details of the plan covered in this New York Times Op-ed. The article rightfully acknowledges the high risk many people face of outliving retirement assets but the solution causes all sorts of problems.

Yes, the authors do in fact believe that a federally issued inflation adjusted annuity is the answer to the challenge of longevity risk. In my opinion this is an extremely reckless proposal for several reasons.

Here are my thoughts based on what’s mentioned in the article.

First, it is stated that there is no single financial product capable of dealing with longevity risk. That’s news to me since insurance companies, as I understand, have been properly managing assets for retirement income for several centuries now. The authors do note that private annuities go part of the way to address the problem. If they don’t go all the way it’s a funding issue and no fault of the annuity product itself.

Next, and I quote, “By doing good for individuals, the federal government could actually do well for itself.” The problem here is that the government always does well for itself. Congresses past have helped themselves to the social security trust fund and that is a critical reason why that fund is costing taxpayers so much money and is projected to go insolvent in less than 30 years. The fox is already guarding the henhouse. Why would we put more chickens in there?

Also, the article mentions the risk of potential insolvency of insurance company and states that the fed is well-equipped to carry the liability instead. Again, I’ll quote.

“…how can someone — particularly a young person — know for sure which insurance companies will be solvent half a century from now?”

How indeed? Well, I don’t know, except for the fact that the federal government is already over budget and deeply in debt. Insurance companies, on the other hand, are solvent, profitable and suitably hedged for future obligations. If I were looking for a good steward for my money, I’d rather have a hole in my head than trust more of my financial well being to those spend-happy egotists in D.C.

Lastly, when you look at how the proposal would be structured it’s no different than current annuity contracts. It’s like these guys just realized what annuities are designed to do and figured that the government should get in the business. Sorry guys, your idea is a couple hundred years behind its time. Any notion to the thought that the federal government could achieve better results than insurance companies cannot be grounded in actuarial analysis. Do the American public a favor and run some numbers to assert these claims.

At a time when social security is projected to account for nearly 40% of retirement income for the average individual, the last thing that should happen is to ensure more private money to that public institution. Does anyone remember Enron? So many employees got hurt because they were banking on Enron pensions, planning on cashing out Enron stock options and had 401(k)s heavily invested in Enron stock. That’s a direct example of how the lack of diversification put millionaires on food stamps. How is this proposed strategy an less risky?

Annuities work as designed and no meddling from bureaucrats will improve the situation. The reason I’m citing this article is to illustrate the fact that you can’t count on anyone but yourself for long-term financial security.

If you feel so inspired, I would love to have some comments or questions on this post. Please… tell me what you think!

Bryan J. Anderson
800.438.5121 [email protected]

 

Changes In the Long Term Financial Landscape

These days it seems there is almost too much to think about when trying to manage assets for the long run.  Let's forget about the traditional problems retirees deal with for a minute.

Whether we like it or not, the financial landscape has and will continue to change dramatically.  The source of my thoughts here is an article written by Michael Casey Jr. in the Wall Street Journal.  In the article he talks about the changes in expectations and investment strategies that will be in order for generation Y to accumulate wealth.

Now, there's more here than just and article you should pass along to your children and grandchildren.  You should most definitely do that.  But isn't it also relevant for anyone challenged with the task of appropriately managing personal assets for 20 or 30 years… or possibly longer?

Indeed it is.  I encourage you to read the article here.

Mr. Casey gives three major points of consideration that show the cards are stacked against the average investor playing the U.S. equities markets.

1.) Equity trading and investing is increasingly an algorithmic game where traditional investment strategists are now in the minority.

2.) As baby boomers transition to more fixed investments and guaranteed products, the demand for domestic equities will decrease.

3.) The U.S. is no longer in a dominant position of being able to dictate a wide variety of global economic terms.

These and many other related global factors show us that no matter what happens we will have to get used to dramatic changes in how assets will be managed for maximum profit.  That includes you, me and everyone we know.

Is there a chance that policy makers will make the U.S. competitive again?  Let's hope so, but we already know not to count on that.  So, now is the time to do all you can to make assurances where possible.

Please read Mr. Casey's article and feel free to send a comment my way if you'd like to share a thought or two.

As always, I can be reached by phone or email.  Have a great week!

Bryan J. Anderson

800.438.5121 [email protected]

Longevity Risk In Annuities

Understanding Longevity Risk and Your Retirement Income:

With the advancements in medical care and standard of living worldwide, we are all fortunate to expect longer lives as a result.  On the plus side of more time is the opportunity to do and experience more in life.

From an economic and financial perspective, there are a lot of challenges we face globally.  Failure to prepare for a longer retirement could have serious consequences.

The article I’m recommending this week comes from the New York Times and describes the difficult issues government and social programs face.

The article… The Financial Time Bomb of Longer Lives

Social Security and Medicare are already over-burdened and the majority of retirees aren’t yet participating in the system.  Are benefits safe?  Where will we get the necessary funding to cover the promises these programs have made?

Regardless of what happens with social programs, it is important to control what you can and give yourself the best chance of living comfortably throughout retirement.t

Would safety, tax deferral and guaranteed lifetime income give you additional peace of mind?  Annuities were made to solve problems like this.

For ideas on how you can optimize you retirement income, call or email with questions about escaping the coming Financial Time Bomb.

Bryan J. Anderson

800.438.5121 [email protected]

Using Annuities to Combat Longevity Risk

AMERICAN ACADEMY OF ACTUARIES LOGOAn actuarial statement regarding annuities and longevity risk has just come across the the PR Newswire.

Longevity risk is of course the risk a person has of outliving retirement assets.  This statement talks about how you can do more with less when using income annuities in retirement.  Apparantly it takes 50% more assets to equal the income generation of annuities.

And this is all according to the American Academy of Actuaries.  I’ve mentioned this several times before but the argument is strengthened with a complimentary study from the group of professional mathematicians.

Further, this leaves little doubt that annuities should play a critical role in prudent retirement income planning.  Whether you have just enough to retire or barely enough, guaranteed income should serve as a foundation.

Now, everyone is different so solid analysis and advice is key to designing a retirement income portfolio properly.  If you are not already a member of Annuity Straight Talk, join today to learn what annuities can accomplish for you.

The report can be found here.

Do You Need Lifetime Income

Lifetime pensions from companies are going the way of the dinosaur. Consequently, the thing most people nearing retirement are worried about is outliving their nest egg. People long for the safety a pension provides- monthly income that lasts a lifetime.

Well, there is another way to achieve this and that is through lifetime annuities from insurance companies. Insurance companies provide insurance against risks, be it accidents, flooding, etc. Longevity risk is the risk of outliving your retirement money, and insurers are willing to make policies on this risk factor as well.

Annuities are rising in popularity as the number of Americans who are nearing or in retirement increase.  Lifetime Annuities are a great fit for many, and guarantee a lifetime income regardless of how long you live.

There are many types of annuities that in various ways can offer lifetime income.  One way is to purchase the guarantee of lifetime income with one lump sum premium up front. The amount of your monthly payment will be determined by your age, location of residence, gender and the amount of your lump sum premium.

Lifetime annuities offer the security of income without the risk of eroding your principal base.  There are literally thousands of ways to guarantee income with lifetime annuities, and the selection process can get quite involved.  Before making any purchase decision, you will want to address questions of return on your investment, return of your principal, credit quality of the issuing company, flexibility of premium payments, inflation, and other issues.

We detail these and other decision factors that you should address when seeking lifetime income in The Annuity Report and invite you to Contact Us for more information on this process.

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How to Design Your Own Private Pension

"View in Wall Street from Corner of Broad...

Over the previous pages, we’ve taken an up-close look at how pension income is the central core of a retirement income plan.  The purpose of the series is to highlight the important considerations to address when crafting a plan to convert a lifetime of savings into an income stream that will fully sustain you in the years ahead.  I’d like to revisit the main points of this series before we jump into the specific proactive step.

So, here’s a snapshot of what we covered based on excerpts from the series.

Part I:  The Value of Pensions

Why is a pension such a good thing?

Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement.

A stable base of income allows more flexibility with your other assets.  With a guaranteed baseline income secured, you can focus on growth with the other assets to overcome any financial obstacle you meet in the future.

The importance of guaranteed income is further reinforced when you take into consideration the various challenges that make retirement planning difficult.  So we continued with…

Part II:  Financial Threats in Retirement

There are definite threats with a poorly crafted plan.  When planning to overcome longevity risk, market volatility, and inflation, the actions you take now must be calculated and deliberate for the following reasons…

No one knows how long each of us will live which makes it difficult if not impossible to determine appropriate spending levels.

No one wants retirement income to be subject to the whims of Wall Street.

No one has a clue what a dollar will buy in 20 or 30 years.

This is why everyone needs and should want a stream of guaranteed lifetime income.

The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible foe emergencies or for when you realize that paycheck doesn’t accomplish what it could years ago.

The importance of planning for these threats is apparent, and traditional asset management has long been considered to be capable of meeting the challenge.  In the name of prudent decision making, a critical examination of that line of thinking is mandatory, which led us to the following post.

Part III:  Tradition Asset Management Doesn’t Work for Retirement Income Planning

I’ll never ask you to take my word for it.  In this installment several studies were offered as a reference that allowed me to conclude with this statement:

The biggest problem to this [Traditional Asset Management] approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely:

Longevity Risk

Market Volatility

Inflation.

Your income therefore all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.

If you had a choice, when would you like your retirement income to be reduced? I vote never.

I’ll repeat myself: the traditional approach to retirement income planning does not work as it has absolutely no guarantee of success.

There is a stark contrast between the methodologies, risks, and benefits of asset management, and the needs of income planning.  That requires an individual to approach each of those targets from a different angle, which led us to the solution in the next post.

Part IV:  The Pension and Annuity Answer

Again, several academic studies were provided to give you a solid base of knowledge to use in this important decision making process.  Here’s what they had to say:

These studies combined speak directly to the central point of this ‘Pension Series’ which highlights the benefits and the necessity of guaranteed income.1) Cover your basic expenses with a source of guaranteed income you can’t outlive.

Annuities allow you to do that more efficiently than any other asset class, and frees you to allocate additional assets to optimize portfolio growth over time.

2) Continued portfolio growth with a guaranteed income safety net gives you the flexibility to ride out market corrections and makes additional funds available to provide for financial emergency or inflation.

That brings us right back to the beginning where we looked at the variety of benefits you will receive after securing a source of guaranteed lifetime income.  This is primarily a stable cash flow foundation through your entire retirement, coupled with flexibility and growth in  additional assets.  It’s not only the safest route to take but also the most profitable.

Now it’s time to find the most efficient source of income for your situation.  It’s never as simple as just picking a product.  There are many factors that need to be addressed for you specifically.  This is a serious task and you deserve more than what a basic ‘product salesman’ can offer.

Are you ready for a set of guidelines to follow when designing your private pension, and get on the right path to long-term security?

Click on to the final installment to design your own private pension….

Traditional Asset Management Does Not Work For Retirement Income Planning

10 Year Average Returns Are Not A Safe Guide F...

10 Year Average Returns Are Not A Safe Guide For Retirement Income Planning

Now that we know the major threats a portfolio will face through retirement, it’s time to look at the traditional approach to conquering those challenges.

As you work and save for retirement you are taught to be flexible and adjust to the constantly changing economic environment. Over the years the typical advice has led people to save incrementally, use dollar cost averaging, buy low/sell high, and shift toward more stable fixed return assets like bonds and treasuries as retirement approaches.

These asset accumulation strategies fail to offer the kind of assurances investors need when it’s time for those assets to support you entirely. These traditional management strategies will have a place in a well-balanced portfolio, but not the leading role that the major management firms would like you to believe.

Regardless of how traditional asset management advice has worked for you to date, there is good reason to diverge from that path, at least in part, when it’s time to withdraw assets.

As luck would have it, this great article on the subject of the 4% Withdrawal Rule was published in the Wall Street Journal recently. And This Recent Post explores the topic further.

In summary, recommendations based on complex computer models have traditionally suggested it’s safe to withdraw 4% to 5% of a portfolio for income. The equities markets return 10% in an average year so over time your income should increase to combat inflation. As long as the balance increases you’ll never run out of money no matter how long you live…..

Seems easy enough, right? Well, for various reasons that strategy hasn’t performed to plan when put into practice. Recent market performance models now put safe withdrawal rates at just 1.5% to 2% of a portfolio, or recommend drastically reducing consumption in bad years.

The first red flag is the ‘probability of success’ attached to a strategy when the computer spits out your numbers.  And most distressing is the sheer random, insecure nature of a total reliance on the markets….

The Problems With Probabilities:

When you put your faith in a system with a low probability of success, market fluctuations will require income adjustments and constant changes to spending patterns to stay on track.

As we understand from the previous page, there are numerous financial threats in retirement.   And with a statistical model, there is no guarantee for success, only a statistical chance. Sure the market may average 10% in the long run but volatility affects you differently when withdrawals are needed for income, regardless of whether the market is up or down today.

The Vanguard study noted in the article further asserts the point this way: If investors are relying on either gains in the stock market or bond-market yields to make their money last, “then investors must either accept continuous, relatively smaller changes in spending or else run the risk of having to make abrupt and significantly larger adjustments later.” Feel free to download read the Vanguard study here.

In essence, suffer now or suffer more later. That may not be the kind of worry-free retirement plan you’re looking for.

Furthermore, new variables that take into account market conditions at the time of retirement are given no consideration in current models.

Low interest rates and high stock valuations create a double whammy.
Low interest rates mean that the bond yields your portfolio will need to meet projections aren’t available in the current market.

And currently high stock valuations increase the probability of a market correction that could spell early disaster for the most carefully designed market based retirement income plan.

So what is “probability of success”? In realistic terms, it is the chance of failure.  When it comes to retirement income and taking care of your basic expenses, failure is unacceptable.  Why expose yourself to probability risk at all?

The biggest problem to this approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely, Longevity Risk, Market Volatility, and Inflation.

Your income therefore all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.

If you had a choice, when would you like your retirement income to be reduced? I vote never.

I’ll repeat myself: the traditional asset management approach to retirement income planning does not work, because it has absolutely no guarantee of success.

It is true that if assets are sufficient, continued market participation will lend many benefits in retirement.  But this participation could come at a steep cost if the majority of your assets are exposed.

While you are working, current spending depends on your paycheck, and market dips are affordable because you don’t need that money right now.

Spending in retirement shouldn’t be any different. Income assets and growth assets should be held separately so you can get the most from both.

Separation of powers, so to speak, is an easier approach and will yield more for your future benefit.

Next I will come full-circle and talk again about how the pension-approach will alleviate this unacceptable ‘probability of success’ that is inherent when too much weight is given to an algorithm. Computers don’t care about your finances but I do.

Carry On To See The Solution…..

The Financial Threats In Retirement

Retirement

Retirement Threats

It is critical to understand the various financial threats in retirement that you will face over the long run and to plan accordingly so your retirement years are smooth sailing.  For the most part these challenges are things you already understand, but most likely you do not know how to solve them.

Previously, we looked at the value of a guaranteed, pension-like income.  A steady, guaranteed stream of cash flow through retirement.  Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about.

Any of these threats individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.

Longevity Risk

Longevity risk simply refers to the risk of outliving your assets.

While this could be the scariest issue of all, in reality, it is probably the easiest to problem to solve and will lessen the impact of all other threats.

Solution: If you have guaranteed lifetime income, you know you can never outlive a paycheck.  As I wrote previously, “Without guaranteed income, you could be relegated to constant worry over appropriate spending levels.”  Negative investment performance could be a devastating blow to your lifestyle.

That risk can be eliminated by a guaranteed source of income.

Market Volatility Risk

 Market volatility can mean the difference between a happy retirement and a stressful retirement.  Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement or early on in retirement.  One IRA statement we recently reviewed showed a meager 1.76% annual yield after more than 20 years of saving and investing.  This is dismal performance, especially when it’s just a few years from retirement.

In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets.  How do you escape this trap? Simple…

Guaranteed Lifetime Income

Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels.

When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.

Inflation Risk

This one is tricky.  As they say, a dollar just won’t buy what it used to.  Now I don’t care what anyone says, there is no action you can take today that will fully insulate you from inflation tomorrow.  Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets.  In economic circles that is called lost opportunity cost.

The key to beating or at least mitigating inflation is to remain flexible.  Lock in what you need now and let the rest of your money grow for tomorrow so it is available to provide what you need in the future.

Mitigating Financial Threats Summary:

This all fits together and comes back to one simple theme:  Guaranteed Lifetime Income protects you and allows you a choice in retirement.

No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels.
No one wants retirement income to be subject to the whims of Wall Street.
No one has a clue what a dollar will buy in 20 or 30 years.

This is why everyone needs and should want a stream of guaranteed lifetime income.

The major benefits are knowing you’ll never run out of income, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

In the next page we examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution.  It’s time to unlearn everything you’ve been taught.

Click To Continue…. See How Traditional Asset Management Doesn’t Work….