Retirement has been redefined by a new generation who are funding their own. However, in their struggle to generate lifetime income, they will soon face one risk of the utmost concern: the probability of living far longer than their parents did.
The bull market and time are your best friends in the accumulation phase, healing your past financial mistakes. But if you are in the withdrawal phase, time works against you. And therein lies the potential problem: the strategies that drove you toward retirement will not get you through retirement.
“It’s not about dying rich, it’s about living rich”
Referring to the “old” retirement, New Retirementality author and lecturer Mitch Anthony says individuals saved their money, and also did some things they didn’t truly enjoy, just so they could die rich. “They needed a trustworthy advisor to help them navigate the plethora of financial decisions needed to make in life,” he added.
The truth is, most wealth was accumulated for almost 30 years, even if they’ve changed jobs, and used dollar cost averaging in 401(k) plans, retirement plans or investment programs. But when they began the withdrawal phase using dollar cost averaging, it forced them to sell more when the market was low, and sell less when the market was high.
Sadly, this approach resulted in some people running out of money. Drawing down assets instead of building up more was, unfortunately, the traditional model.
A 401(k) can be an essential wealth-building tool. According to the most recent Retirement Confidence Survey (RCS), eight in ten workers (81 percent) say they expect that their workplace defined contribution plans, such as 401(k) or 403(b), will be a major source of income. “Satisfaction with defined contribution plans encourages their use in building up assets for their retirement,” said senior research associate Craig Copeland.
Creativity, optimism and confidence abound
While funding retirement still remains one of the biggest economic and social challenges facing the world today, three in four workers (72 percent) in the RCS reported feeling ‘very’ or ‘somewhat’ confident about being able to afford basic expenses in retirement, including 27 percent who feel ‘very’ confident.
Advisors can get resourceful in their strategies. Some will use a “bucketing” strategy for retirees – selecting a certain segment of assets to pull income from first, and not touching stock assets or equities that are fluctuating and have time to recover.
For example, let’s say you’re retired, with 60% stocks, 40% bonds, and looking for a 5% income stream. If your advisor pulls income out of your bonds, your income is taken care of for 8-10 years without ever touching your equities, which would leave recovery time in the event of a bear market. You could look at this as more of a “planned-for” retirement income approach that fits your particular financial need.
Four in five current defined benefit participants from RCS expressed interest in putting some or all of their money in guaranteed lifetime income products, regardless of whether the product is in an investment plan option or as a separate product purchased outside of the plan.
Advisors tend to use guaranteed annuity income payouts – not necessarily for the returns they’ve generated, but for the guarantees that back them up.
For example, your advisor suggests repositioning a sum of money from your portfolio into an annuity paying 6% for life. You’ll be guaranteed this income if the markets drop and the insurance company remains in business – which brings up an important question: what if the insurance company has problems? What would happen?
- Advisors rely mostly on A+ rated companies with strong financial strength and claims-paying ability. As in school grades, ratings are from A to D.
- Every state has a Guaranty Association to help pay the claims of financially impaired insurance companies. State laws specify the lines of insurance covered by these funds and the dollar limits payable.
Consult your Hefren-Tillotson advisor for your state’s insurance details regarding any policy you consider purchasing.
If you have a smaller portfolio, your advisor will have you list your expenses and segment them between basic and discretionary, matching basic expenses against known sources of income to identify an income gap.
Assuming there is a gap, your advisor might first suggest, and more importantly, educate you about the benefits of using a Single Premium Annuity to supplement that income to cover your basic lifestyle expenses. Granted, this is not your only choice. A bond ladder will act like a Single Premium Annuity, too, providing income.
Ask your Hefren-Tillotson advisor for more information and the best course of action for your situation.