Many pre-retirees and retirees wonder how they can create a stream of income that lasts a lifetime. Here is a potential solution.
Planning for and entering retirement can be confusing and challenging for many individuals, causing so much uncertainty in such a critical time of their lives, especially when it comes to generating a steady stream of income that will last throughout their retirement years.
In this case study we will examine a situation for a couple who are on the brink of retirement and are looking to create a stream of income that lasts their entire lives and provides them with the means to cover the expenses for their desired lifestyle. This example is hypothetical and is only used to propose a potential solution for a couple looking to create a new vehicle for retirement income. Your situation may vary, and we strongly encourage you to speak to your financial advisor before making any decisions regarding your financial future.
Background
Edward and Roxanne are high school sweethearts and a couple in their late 50s who have been saving diligently for retirement throughout their entire careers. Their dedication has provided them with a sizeable nest egg, giving them a chance to support themselves should market outcomes fall in their favor, but they remain concerned about the unpredictability of the stock market and the impact it could have on their retirement income if the market were to enter a period of prolonged decline or volatility. Knowing that the few years leading up to retirement as well as the few years at the beginning of retirement are the most important, they approach their financial advisor and ask about potential solutions that can create a lifetime of income and protect them from possible market downturns.
Typical Potential Solution
In a traditional portfolio, pre-retirees and retirees rely on some combination of stocks and bonds to generate income during their retirement years. Ideally, the portfolio is balanced based on a person’s appetite and tolerance for risk, accounting for both their personal goals and their objective situation. In a perfect scenario, the portion of a portfolio made up of stocks would be for growth and income, while bonds tend to offer more stability. Then, a standard approach is to withdraw 4% of that portfolio each year to provide for your desired retirement lifestyle. This is referred to as “the 4% rule” and is often looked at as a very generic approach to retirement planning that according to some, could potentially allow funds to last 25 years or longer.
Proposed Potential Solution
After consulting their financial advisor, Edward and Roxanne see holes in the 4% rule. For instance, they grow concerned about increasing life expectancy, and the average 25 years of retirement begins to look more like their assets need to last 30 to 35 years or even longer. Furthermore, withdrawing 4% of their funds each year could prove to be dangerous if they face stock market declines and their portfolios are drained by a combination of withdrawals and plummeting markets.
For their concerns and unique goals, their financial advisor recommends that Edward and Roxanne purchase an annuity, which is a contract between an individual and an insurance company that provides a guaranteed income stream for a set period of time, or for the rest of their lives. Some annuities, such as fixed indexed annuities, even allow participation in market upside based on the terms of the contract without actually being subject to market losses. Principal protection, even during periods of market downturn, can help Edward and Roxanne fight retirement risks like sequence of returns risk, longevity risk and income risk.
Conclusion
After speaking to their financial advisor, Edward and Roxanne were able to find an annuity product that will help them create a reliable stream of income for life, no matter how long they live. While they might have found success had they left their funds in stocks and bonds, purchasing an annuity allowed them to achieve principal protection, growth with the potential of market upside and a steady stream of income that they can count on in retirement, all based on the claims-paying ability of the issuing insurance company.
Insurance companies are constantly innovating to create new annuity and insurance products that provide multiple benefits in retirement. Your financial advisor can help you explore all of your options based on your situation and objectives.
To learn more about potential solutions that can create an income stream that lasts throughout retirement, please give Sylvan Financial Advisors a call at (201) 282-5332.
Keep in mind, this article is for informational purposes only and not to be construed as financial or investing advice, nor is it a replacement for real-life advice based on your unique situation. Investing and retirement account rules are constantly changing, and it is recommended that you work with your financial professional to assess and invest based on your unique situation.
