Accumulation and Distribution, be sure you understand your options.
Most people today face the daunting task of living off their retirement savings for the rest of their lives. Traditional pensions are in the minority these days, as more and more companies and institutions move away from them.
One of the most overlooked aspects of planning to live off of one’s savings is the two distinct phases a future retiree will have to face: The Accumulation Phase and The Distribution Phase. Let’s take a look at both.
The Accumulation Phase is where you’re contributing to your retirement assets and growing them for future use. In the early stages of the Accumulation Phase, when you are younger, you can take risks that may sometimes backfire. And when they do, you still have plenty of time to make up losses as time moves forward. But when you are closer to, or in retirement, losses incurred at this point could prove devastating to your future.
So let’s turn to the Distribution Phase and the perils that come with it. You’ll be tasked with converting your retirement savings into Income, which will have to last the rest of two lives if you have a spouse. Your risk exposure should now be as low as possible. Why? Losses incurred during the Distribution Phase could prove impossible to recoup. Let’s look at an example.
Mike and Mary trust their broker, retire, and keep their funds exposed to market risk. They’ll use a 4% withdrawal rate to live off of their assets. A recent Wall Street Journal article stated that if you used a 4% Withdrawal Rate for your retirement funds, with a 55% stock and 45% bond portfolio, you have a 25% chance of running out of money if you or your spouse make it to age 90. Think about that very carefully for a moment. Would you get on an airplane if you knew there was a 25% chance it would fail? How about stepping into an elevator that you knew worked 75% of the time.
So let’s crunch some numbers to illustrate the risks. You retired with $1,000,000 in savings, and you’re planning on using the 4% Withdrawal Rate to fund your retirement. So you’ll be withdrawing $40,000 per year, with the assumption that your savings will grow at a rate sufficient to cover your withdrawals, and adjusting for inflation. Now let’s assume that for the first 5 years, your savings covered your withdrawals and you still have your $1,000,000 amount intact. So far so good, right?
But in the 6th year, a bear market occurs, (bear markets actually occur every 3.2 years on average), with an average drop of 20%, which would reduce your savings to $800,000. So how much of a gain does it take the following year to get back to $1,000,000 again? No, it’s not $200,000, the answer is actually $240,000. Keep in mind you’ll still need to withdraw the $40,000 to live on that year. So the total return that you’ll need to counter a 20% loss in this scenario is actually 31.5% ($240,000 ÷ $760,000 = 31.5%). And how likely are you to gain 31.5% in one year? The average bear market lasts about a year, but can last longer (2000-2003), so that could have even more of a negative impact. Regardless, you’re now faced with withdrawing 4% of $760,000 for the current year, which would reduce that year’s income to $30,400.
This is the beginning of the end for a lot of people. It’s one of the primary reasons people go back to work in retirement, scale back on expenditures or sell assets. These corrections can happen anytime during retirement, in one year, or prolonged over several years. But you can see the danger. If a loss causes your financial ship to start sinking, you may never be able to bail it out quickly enough, and you could eventually sink completely. So we can see that losses in the Distribution Phase can be catastrophic.
So what if there was a way to set up a no-risk Guaranteed Lifetime Income Plan, that will function much like a traditional pension plan? The good news is, these plans been around and used successfully for many years!
It’s called a Fixed Indexed Annuity, developed in the mid-90s as a no-risk way to grow assets, and address the loss of the traditional pension plan. Here are the highlights:
– You fund it, you own it, and it’s administered by a well respected multi-billion dollar insurance company.
– Plan assets can increase during up years in the markets, but won’t decrease due to market downturns.
– When you’re ready to start Income, your income is guaranteed to last as long as you and your spouse are alive.
– Your annual income payment will never decrease, and with some plans can increase over time to help with inflation.
– You’ll know your Withdrawal Rate and in some cases your Annual Income Payment in advance, so you’ll know exactly when you can retire.
– You’ll have a 0% chance of failure or running out of money if you or your spouse lives to be 90 or beyond.
– With some plans, the annual income payment can increase to help cover Long Term Care expenses.
– Any proceeds left after the final spouse passes are distributed immediately to your heirs, free from probate.
So think about what you worked for all these years. Was it to stress and worry about your finances, year after year, knowing that a single market crash could derail a lifetime of work? Risk having to look into your spouse’s eyes and tell them that you’ll have to cut back on spending, or go back to work.
Or was it to enjoy life! Spend time with your family, play golf, travel, pick up a new hobby, volunteer. You owe it to yourself and your spouse to learn more about how Fixed Indexed Annuities can fortify your overall retirement picture, and provide you with a rock solid Lifetime Income Plan.
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