What matters most?
Every day I speak with clients, one of the hardest things I must convince them of is that it’s no longer about chasing the highest interest rates. You see, most of my clients are retired or very near retirement. They are in the so-called “fragile decade,” which is the five years before retirement and the five years after. This decade could have devastating effects on your assets if you enter retirement in a bear market. This risk is known as the “Sequence of Returns Risk.”
If you compare the whole of your retirement to the analogy of climbing Mount Everest, the ascension of the mountain is your career that you have been saving and investing in – this is when you have time to recover from setbacks in the market and can afford some risk. Now that you are retired or nearing retirement, you are at the summit and can see the vast horizon that is full of the adventure and excitement that you hope to enjoy for the rest of your life. However, to advance towards that horizon, you must get down the other side of the mountain. This side of the mountain is analogous to never running out of money, no matter how long you and your spouse live (hopefully for a very long time in good health). What most of my clients find interesting with this analogy is that approximately 85% of the people that have perished on Mount Everest died on the way back down! Mainly from a lack of oxygen. Think of your retirement money as oxygen – you don’t think about it that much when you have enough, but you start to panic when you feel it is lacking.
The question then becomes, how willing are you to risk your oxygen? Regardless of the return your “money guy” speculates that he can get you with a traditional retirement plan (diversified portfolio of stocks, bonds, and mutual funds), you will only be able to withdraw a certain percentage from the pile of money you have accrued up to the point of your retirement start date. What is that percentage? According to the Monte-Carlo simulations, it is 4%. Unfortunately, a surprisingly large number of people are unaware of this and remain under the impression that they will be able to live off interest returns while keeping their principle intact.
If you think this is terrible news, it gets worse. According to Dr. Wade Phau, the new safe withdraw rate is 3%. That’s if you want a 90% chance of your money lasting for 30 years.
But wait, it gets worse!
You also have to factor in a reduction of 0.5% for every 1% in fees that you are paying. Now, the person who is only paying 1% in management fees (most people pay more) can only safely withdraw 2.5%. That means the person who has sacrificed and saved and invested wisely throughout their career can only safely spend $2,500 for every $100,000 they have saved for retirement. And there is still no guarantee that your money will last the rest of your life. Can you feel the oxygen leaving the room? Is there another option that will allow you to spend MORE of your money AND give you a GUARANTEE that you will never run out of income, no matter how long you and your spouse live?
There is! It’s called a Fixed Indexed Annuity with an Income Rider.
There is a very high likelihood that if you and your spouse are over the age of 60, an appropriate annuity will provide a guaranteed lifetime income that has a payout rate of 4% or higher. To find out the truth from an expert in this area, please feel free to contact us.
