Guaranteed Income For Life, Too Good to be True?
When it comes to retirement, wouldn’t you like your retirement income to last as long as you do? Wouldn’t you prefer to maintain your lifestyle, enjoy vacations, and thrive in a retirement of significance and security? However …
Will you have enough assets to make this vision a reality?
The truth is, 50% of Baby Boomers are “extremely concerned” about the possibility of outliving their income.
THE 4% RULE – NOT ENOUGH?
Traditional planning addresses this concern with the “4% rule.” This generally accepted rule states that you should withdraw no more than 4% of an asset in retirement, and then slightly increase that amount each year to offset inflation. The 4% rule could be effective in some cases, but it has no guarantees. In other words, you could run out of money. What’s more, money in traditional accounts is subject to market volatility, which could cause you to lose financial principal. In the recent article “Say Goodbye to the 4% Rule” the 4% rule is severely challenged.
A CLOSER LOOK
Let’s take a closer look at how the 4% rule stacks up against a retirement vehicle that meets our strict guidelines for safe, effective planning, the fixed indexed annuity. As an example, we’ll take a hypothetical 60-year-old named John who wants to retire in five years. Based on his Social Security and pension income, he wants an additional $40,000 a year through the rest of his life.
99% of annuities in the marketplace don’t meet our strict requirements.
In fact, until recently we’ve refused to offer them to our clients.
Required Principal: This traditional approach would require $1,000,000 of his retirement assets to generate the desired annual income of $40,000 ($1,000,000 x 4% = $40,000).
The Comparison: John’s money may be more liquid or have more opportunities for gains than a fixed indexed annuity. But … John still has the possibility of outliving his income, and he isn’t protected from market loss.
APPROACH 2: FIXED INDEXED ANNUITY
Required Principal: This new approach would require $570,000 instead of $1,000,000 of retirement assets to generate the $40,000 a year income (assuming John waits five years before starting income withdrawals).
The Comparison: A fixed indexed annuity would protect his principal from market loss and provide guaranteed retirement income for the rest of his life. (With this particular annuity, John would be able to have a withdrawal percentage of 7%.) Fixed indexed annuities do provide less liquidity than some traditional vehicles, and their opportunities for gains are capped (although safety of principal and predictable gains are hardly downsides in the high-stakes realities of retirement).
SIDE BY SIDE COMPARISON – Download the PDF