Many baby boomers are approaching retirement or are already in retirement and are worried that they may outlive their savings. This worry is compounded by the advances in medical care which is extending the lives of millions of Americans, and the historic low rates investors are receiving on their savings. If those two trends weren’t enough cause for worry, the bursting of the real estate bubble has left millions of seniors with lowered values in their primary asset, their homes! These trends have wreaked havoc on retirement plans that looked quite sound even 5 years ago. While we’re spreading doom and gloom we’ll throw one more monkey wrench into the stew and that is the problem with downsizing. Aside from the previously mentioned issue with people being trapped in their real estate holdings hoping for a bump in valuation and market demand, a recent Wall Street Journal article points out that plans to cut down on one’s living expenses once retirement begins has proved to be difficult. Who wants to give up their cable TV, wireless phone, or internet service?
Moreover, this worry about outliving one’s savings has compelled many baby boomers to take more risk in order to shore up their retirement funds. The favored risk is the stock market through direct stock holdings or via mutual funds. The appeal is understandable- purveyors of stock investments show a 30 year return on the S&P 500 of about 8%, which beats the heck out of money market rates of about ¼ of 1%! The problem is that most stock promoters don’t like to talk about the trend over the last 5 years because the financial meltdown hurt most portfolios so much their return has been about zero. Once in a lifetime anomaly you say? Well we had the tech wreck about 7 years before the subprime crisis which also devastated stock portfolios. Stocks are great in proportion to your total holdings and your time frame until you need the money. It makes perfect sense for a 40 year old to put up to 80% of their portfolio in stocks because they have 30 years to let the market’s twists and turns play out. Retirees should have much less of their portfolio in the stock market because they need reliability of returns in order to live off the money!
Most of the major insurance companies have annuity products that offer “lifetime income” payments regardless of how long a person or couple may live. Also called “longevity insurance,” these annuities are designed to offer guaranteed returns of 4 to 6% yearly prior to the income payments beginning such that the investor chooses when the lifetime income stream begins. With such an annuity, would-be retirees can use a small piece of their portfolio to purchase a relatively large income. In return, investors must be willing to defer that income—typically, for several years—and give up access to at least some of their money The idea is the longer one can allow the value to build, the greater the monthly or yearly payment amount becomes. These annuities can be purchased using a “laddering” approach so that you may purchase them at different intervals as well as begin payments in different future years. .
Politicians and economists have proposed using these policies to help prevent workers from running out of money during retirement. In February, the Treasury Department issued a proposal that would make it easier for people to buy them in their 401(k) and individual retirement accounts. If you purchase these annuities in your 401k or IRA, you may be required to start the income payments at age 70 and ½.
There are many variations on this product such as how much additional money you have access to if needed and leaving unused balances to your estate. Your advisor can tailor this investment to fit your needs. The important aspect is that placing some of your nest egg into this investment will avoid the loss of capital in the stock market but also assure you of income until your death.