We spend decades saving for retirement, but converting retirement funds into income often turns into a “seat of the pants” proposition.
The biggest challenge of retirement planning is ensuring that we will not outlive our retirement funds. Moreover, it is likely that a time comes when we can’t personally manage our funds due to the infirmities of old age. Worse yet, we may leave a spouse who has neither the experience nor the vitality to manage retirement funds and convert them into income.
Even if we believe our retirement nest egg is large enough to avoid dissipation, it still makes sense to put a plan in place that optimizes the efficiency of our funds.
The simple strategy is to estimate the absolute least amount of income necessary for retirement. For example, assume that amount is $5,000 a month. Then, subtract an expected monthly Social Security payment, which we will assume to be $2,400 a month. That leaves $2,600 a month required to meet the minimum amount of monthly income for life care and medical needs.
The most effective investment vehicle to guarantee $2,600 a month for life is a lifetime annuity often referred to as a Single Premium Immediate Annuity, or SPIA. No bells, whistles and difficult to understand moving parts, just a guarantee of income for life. Choose a “Joint and Survivor” payment stream in order to guarantee monthly income for the retiree and his/her spouse, thereby relieving anxiety about leaving one’s spouse the burden of ongoing retirement planning.
The old rule-of-thumb was that we could safely spend 4.5-5% of our retirement funds annually and rest assured that they would last as long we live. With declining interest rates and bond yields, that percentage has slid down to 3-3.5%.
A typical lifetime annuity will pay the equivalent of 5.2% of the initial investment annually. By blending the risk of thousands of lifetime income recipients, a financially strong, life insurance company can efficiently guarantee income and maximize return, given the highly secure nature of the investment.
By guaranteeing a “floor” on retirement income, we have more flexibility to try to maximize returns on our remaining retirement assets, while not worrying about covering the bills, especially as we age and our faculties inevitably decline.
Ten years ago, many people, particularly in North Carolina, took a “seat of the pants” approach believing that their gold-plated Wachovia or Bank of America dividends would provide handsomely throughout their retirement. Many were disappointed. Thus, it may be prudent to have a more disciplined and diversified approach to retirement planning – one that provides security and guarantees monthly income for the lives of both spouses.
About the Author
Tacker LeCarpentier is the Director, Annuities & Structured Products for Lawyers Insurance. Please contact Tacker by phone at (919) 247-9070 or by email at firstname.lastname@example.org.