Have Your Cake and Eat it Too – Potential Retirement Planning Solutions

This is the third is a series of three posts with a focus on retirement planning

Eating_cake_2 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?

Photo on Flickr by Red Label

2 thoughts on “Have Your Cake and Eat it Too – Potential Retirement Planning Solutions

  1. Art,
    Have you read Doug Andrew’s new book Last Chance Millionaire. It focus on how baby boomers that haven’t properly prepared for retirement still can have hope through proper equity management strategies.
    If you would be willing to read the book and write a review, drop me an email and I will send you a copy.

  2. I read your article and I want to give you the following information.
    First here is my background. I am also an arbitrator and mediator for the National Association of Securities Dealers (NASD) and a consumer advocate for investor education.
    Because of my background I have been contacted by many people who are 401k and 403b plan participants who are preparing for retirement. They have told me their companies only give them limited information and never explain their rights in case of a problem or dispute. Their company also never explains what they really need to do to prepare for retirement.
    I created ‘helpcenters’ websites to help investors educate themselves on the right questions to ask a financial professional.
    The main website: http://www.financialhelpcenters.com
    From this website you can link to the other investor educational websites:
    All these websites give basic investor educational material on each subject. They can also download the book for free.
    My book “What All Stock and Mutual Fund Investors Should Know!” is used by State Regulatory Agencies, Attorney Generals office, as investor educational material for employees and residents.
    My book has been endorsed or reviewed by NBC, CNBC, Money Magazine, Wall Street Journal, Consumer Digest, National Center for Women and Retirement Research, American Association of Individual Investors (AAII), American Library Association, and many others.
    My book is available for free to every person who visits the ‘helpcenters’ websites.
    Please let your readers know these investor educational websites.
    Thank you.
    Bruce Sankin

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