 The approach advocated here is to build a strong foundation under your retirement by using an annuity to provide income sufficient to meet your basic living expenses. By focusing on devoting the minimum amount of savings to accomplish this objective, you should be able to determine precisely how much of your savings will remain to meet our other retirement objectives. This remaining money can be allocated to other financial instruments to provide potential growth and the additional income you’ll want for the more enjoyable things during your retirement. One possible benefit of taking this approach might be that you will have more confidence to spend some of your money on those enjoyable things, because you’ll know that your annuity, Social Security and other sources of protected income will be there to provide for your future expenses. Follow the steps below to arrive at the amount of income needed for this purpose. Once you know the amount of your basic living expenses that’s not covered by things like Social Security, you should be able to easily obtain annuity quotes from different insurance companies showing how much money would need to be allocated to the annuity in order to provide that needed income. Step #1 – Estimate your anticipated monthly living expenses during retirement. The approach that you want to take with this step is to try to envision your life during retirement and list the expenses that will be required to maintain your lifestyle. Next to each expense item you should place a check mark to indicate if this is an essential must have expense item as opposed to a want to have expense item. The purpose of listing these expenses is not to create a budget that you will use to dictate how you spend your money. Instead, the goal here is to come up with a total estimated amount of essential monthly expenses. Step #2 – Identify reliable and consistent income sources. In this step, you list the amounts and sources of protected income you expect to have available at retirement to help pay for those essential must have living expenses that you calculated in step #1. Protected income refers to income that is reliable, consistent and lifelong. And generally speaking, the types of income that meets this description are Social Security, employer-provided pension and income annuities. If you have other income sources that you believe are adequately protected, you can include them in the total, but the objective here should be to only include income that you are fairly certain you can count on regardless of future changes in the economy or financial markets. Rental income from property you own that has a long track record of being highly desirable and easy to keep rented might be an example of income you might want to include. If you have an employer-provided pension but are not yet retired and don’t know the amount of your projected pension income, you should be able to obtain an estimate from the employee benefits department at your work.
You’ll also want to obtain a current benefit statement from the Social Security Administration. There are step-by-step instructions in the back of this book showing how you can easily do this online. Step #3 – Obtain quotes from insurance companies. After you calculate your total essential must have expenses in step #1, and subtract your total protected income you determined in step #2, you will arrive at the amount of additional protected income you would want to have provided by an annuity. This will be your annuity income target. Now that you know this amount the correct path is to look for insurance companies that require you to pay the least amount of money in order to generate the targeted income. Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.
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While there are many reasons that a person would purchase an annuity, one major reason is to receive an income that will last as long as a person might live. To meet the qualification of a lifelong income annuity, the period of time that the income is paid is for at least for the life of the annuitant. Other income annuities might provide income for some specified period of time such as ten years, 20 years or even longer. While the annuitant might in fact not live longer than the specific period of time, there is no continuation of income if he or she does, unless the annuity has a payout period that is lifelong. So the basic difference can be stated simply: only a lifelong income annuity carries the specific promise to pay the annuitant a reliable, consistent income that lasts for at least as long as the annuitant lives, no matter how long that might be. To understand why fixed annuities can be a great choice for building your own personal pension, it is important to know that in at least one important way they are similar to your Social Security retirement benefits and many employer-sponsored pensions. Compared with selecting and managing stocks, bonds, mutual funds or just about any other financial instrument that might be used to generate future retirement income, annuities have little in common with the typical do-it-yourself retirement plans.  The responsibility for making sure that the annuity provides you with a reliable, consistent, lifelong income is shifted from you to the insurance company issuing your annuity. With many annuities, at the time of purchase you will know the exact minimum amount of income that will be provided at any future date when you might decide to start receiving that income. In other words, many annuities will provide a schedule that shows that at a minimum you will receive a specific amount of income based on a specific start date. The relationship between start date and amount of income is in some ways similar to Social Security in that the longer you delay the start of the annuity’s income, the greater the amount of the subsequent lifelong income you will receive. Instead of selecting and managing investments in the hope that they will provide lifelong income, with an annuity the insurance company issuing the annuity is promising you in advance the amount of lifelong income you will receive. That promise is backed by the full claims-paying ability of that insurance company. A joint life annuity protects a spouse by providing the continuation of a payout for the lifetime of both the annuitant and the surviving spouse. Lifetime income annuities with 10 years, 15 years or an even longer number of years of certain payments are another choice. These annuities provide for the continuation of the payout for a minimum certain number of years even if annuitant has died. But again, no matter how long the person lives, the income will continue. Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.
It’s not that 401(k) plans are necessarily bad, it is just important to understand that if you are counting on them to provide you with a reliable, consistent, lifelong retirement income you are going to have to do-it-yourself. When it comes to how the money in your plan is invested, it is your responsibility to try to pick the best options from those offered. If you want this money to provide an income, in a certain amount and for the rest of your life, it is you who must find a way to make that happen. Social Security and Employer Pensions mean: protected, lifelong income. 401(k) type plans mean: do-it-yourself investments that are either protected or unprotected depending you your choices. How much income they provide, and for how long is unprotected and based on your skill as an investor and money manager.  Unfortunately, when it comes to do-it-yourself investing, there is a great deal of evidence showing that many people haven’t done so well.
DALBAR Inc., a respected market research firm located in Boston, has been reporting the annual results of its Quantitative Analysis of Investor Behavior research for almost two decades, and the results always indicate that individual investors consistently underperform both the equities and bond markets by a wide margin. And this is true during both good and poor economic periods. Their report covering the 20-year period ending with the particularly devastating investment year of 2008 is even more disturbing, saying, “Equity fund investors lost 41.6% last year, compared with 37.7% for the S&P 500 Index.”[1] So during a year when the stock market was down 37.7 percent, the individual investor actually lost an even greater 41.6 percent. How does the individual investor do during years when the stock market performs better? DALBAR Inc., found that from 1986 to 2015 the average investor substantially underperformed compared to the S&P 500. Over 30 years, the S&P 500 returned 10.35%, but the average investor return was just 3.66%. What is responsible for this under performance? There is much evidence to support that the challenge of do-it-yourself investing is that our emotions can easily get in the way. The emotions of the typical individual investor cause him or her to buy and sell at the wrong time. But being a good investor is only half the battle. Once retired, the participant must now also figure out how to turn what she has accumulated in her do-it-yourself 401(k) type plan into reliable, consistent, lifelong income. Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable. |
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