Fixed Income Annuities, Retirement, Guaranteed Retirement Income
Most of us look forward to retirement. We want to know when we retire, especially in these volatile economic times, that we will have enough retirement income. People are now depending on their retirement investment accounts to provide retirement income for many years, possibly even 25 or 30 years. If a husband and wife are both Age 65, there is 72% probability that one of them will live to Age 85, a 45% probability that one of them will live to Age 90 and an 18% probability that one of them will live to Age 95 (1).
A new research article by Wade Pfau, Ph.D., CFA, Michael Finke, Ph.D.,CFP and David Blanchett,CFA,CFP. called “The 4% Rule is Not Safe in a Low-Yield World.” found that a 4% withdrawal rate (recommended by many financial planners to their clients) in retirement to protect retirees from running out of money is no longer safe.
Their research shows returns during the first ten years of retirement have an inordinately large impact on failure rates. In this study, they estimate the impact of current low bond yields on two retirement planning scenarios – one where estimates of future bond returns are equal to or near current yields, and the other where bond yields and returns revert back to their historical mean.
They said, “We find that failure rates are surprisingly sensitive to a downward adjustment of expected bond returns. With no real bond yield, hypothetical retirees experience a one in three chance of running out of money after 30 years with a 50% stock portfolio. With the current negative real yield, odds are more than half that one will run out of money.These estimates also assume that the historical equity premium will persist and that there are no asset management fees.”
“Because of sequence of returns risk, portfolio withdrawals can cause the events in early retirement to have a disproportionate effect on the sustainability of an income strategy. We simulate failure rates if today’s bond rates return to their historical average after either 5 or 10 years and find that failure rates are much higher (18% and 32%, respectively for a 50% stock allocation) than many retirees may be willing to accept.”
Taking into account these two factors:
1) Couples Age 65 need to prepare to have their money last 30 years to make sure they do not run out of money.
2) A 4% withdrawal rate in retirement is not safe to provide retirement income over a 30 year time horizon.
The question then arises for today’s couples approaching retirement, ” How can we make sure that we will have enough money in retirement, and have certainty that our money will not run out?”
One possible solution is to put a portion of your retirement nest egg in financial products called Fixed Indexed Annuities (FIA). There are many FIA’s from highly rated insurance companies that will guarantee a lifetime income for you or for you and your spouse. These benefits are protected from stock market volatility. The result is peace of mind and money for the rest of your life, without worrying about you outliving your money.
If a husband or wife (they are the same age for this example) start an FIA when they are Age 55 and start income distributions at Age 66 they will receive the following benefits:
(Benefits Based On A $250,000 Initial Contribution To Their FIA)
For this example, I am using the Secure Income Annuity from Security Benefit.
1) $22,310 every year for as long as one of them are living.
2) Home Healthcare Doubler-If the owner of the annuity (the husband or wife) becomes unable to perform at least two of the six basic activities of daily living, they can double the income they receive for up to five years. Therefore, the annual benefit would be increased to $44,620 for up to five years. (Home Healthcare Doubler not available in all states)
Under this example, if the husband or wife lived to Age 95, they would have received $669,300 in benefits from their Secure Income Annuity. The benefits received would be over $750,000 if the owner or spouse received the Home Healthcare Doubler benefit.
Using an FIA (like the Secure Income Annuity from Security Benefit) as part of an overall retirement income strategy, can help to provide retires a safe and secure retirement income.
(1) Calculations based on the mortality data from the Society of Actuaries Retirement 2000 Participant table.t