This is the third is a series of three posts with a focus on retirement planning
All this week we have been studying how to withdraw our money during retirement. First we studied Monte Carlo Simulation, then we used a Monte Carlo Simulation based study to determine how fast we should spend our money in retirement.
The problem uncovered in the study was that we could withdraw no more than 4% of our money in any given year to help be confident that we would not run out of money in retirement. In practical terms that means that if you have accumulated $1,000,000 in retirement funds, that you should withdraw no more than $3,333 a month. Folks, that is pre-tax. Do you feel wealthy yet? Worse yet, while it is a reasonable assumption there is still no guarantee we will not run out of money!
The traditional approach to guaranteeing life long income has been annuities. While life income annuities offer certain tax advantages, they also carry several disadvantages. Perhaps the biggest disadvantage is the availability of principal. Once annuitized, income annuity owners have no ownership in the principal. They only own the stream of income. That means that if they needed money, for whatever reason, the annuity is not an option for anything except income. This fact alone has probably kept more people from purchasing income annuities than any other.
As the baby boomer generation is now entering retirement, innovative insurance companies have listened to their concerns. Some modern Variable Annuities now have optional features which can guarantee lifetime income without annuitizing. That means that you can have your cake and eat it too. Guaranteed lifetime income without giving up access to the underlying investments! Of course the guarantees are based on the claims paying ability of the issuing company.
Keep in mind that these benefits are not free. I have seen them add anywhere from 0.4% to 0.8% in additional annual expenses to a contract. That is okay. The only reason to purchase an annuity is for guarantees and the guarantees already take expenses into consideration. If you do not need or want the guarantees there are probably better places to put your money.
I have kept this discussion very general in nature and have not mentioned any specific products. Would you be interested in product reviews?