What will you do if you run out of money during retirement? What are the consequences if your surviving spouse doesn’t have enough money? These serious questions are reality for many retirees. Nonetheless as I mentioned in my retirement blog, the fear of running out of money has not kept many retirees from speculating with their retirement money. Much of this “speculative mentality” is driven by constant advertising bombardments telling retirees the best places to keep their money. Most of this advice is directed toward making retirement money taller, or bigger, when the real problem is making it longer. It appears that Wall Street has promised but not delivered: as a result many retirees are now back in the job market or have scaled down their retirement lifestyle. Your objective in managing your retirement money should be to avoid running out of money rather than trying to make a financial killing by speculating and taking unsuitable risks. How can you overcome the risk of living too long (longevity risk) and running out of money?
In recent years insurance companies have begun offering longevity risk coverage. The classic insurance principle of managing risk by spreading it over many people works in this arena. Those who die too soon (the unlucky) subsidize those that live too long (the lucky), the same insurance principle employed for protecting homes, cars, health, life and other valuables. A Guaranteed Lifetime Income Benefit is now a routine feature of an annuity contract. Here’s the way it works: you purchase an annuity that pays a competitive rate of interest plus allows conversion into a guaranteed lifetime income at your option. The amount of lifetime annual income depends on the amount of money in your annuity when converted and your age. There are safeguards that prevent you from losing money if you die too soon, but never can you run out of money if you live too long. For many retirees, and those contemplating retirement, it would be wise to consider this lifetime income option. Combining a guaranteed lifetime income from an insurance company with Social Security benefits assures an income regardless of how long you live.
There are other benefits like inflation protection and spousal coverage that can be added to annuities, but each will raise the amount of money needed for a given income guarantee. You can change your mind and withdraw your money lump-sum from the annuity both before and after your lifetime income starts; however, there might be penalties for doing so. Your lifetime income is safe because it is guaranteed by an insurance company – the same insurer that protects homes, cars, health, lives and businesses. What’s more, many insurance companies are giant corporations that have been in business for hundreds of years and weathered depressions, wars, failure of governments and financial meltdowns. Your money is safe.
If you do not like the insurance company solution, consider “laddering” your retirement money in investments that mature at the exact time you need income. For example, you might put money into a liquid account to cover living expenses for up to five years. The money to be used from years five through fifteen could be placed in tax-deferred annuities with staggered maturities and serially turned into income when needed. For income beyond fifteen years, a more adventuresome option might be chosen if the risks are acceptable. Whether you select the “insurance company” or the “laddering” option, work with a financial advisor to tailor a plan for your circumstances. Developing plans without help or failing to plan are common retiree mistakes. Set your course now with professional help.
Shelby J. Smith, Ph.D.
January 2010
This is a question I get constantly on this Retirement Blog. Like most decisions in life the answer is: maybe and maybe not! It depends on what you’re trying to accomplish. Historically, gold has been used to hedge against government failure, inflation, economic uncertainty or as an investment. For example, when governments have been on the brink of toppling (wars, coup d`etat, monetary collapse and more) the demand for gold, along with diamonds, soars in that country. Generally as monetary excesses erode the purchasing power of currency (inflation), gold goes up in price. During depressions and recessions (economic uncertainty) gold generally moves up in price. As the probability of any of these occurrences rise, the demand for gold as an investment also rises. If you want to own gold, what is your motivation?
No other savings vehicle is as misunderstood, under appreciated and maligned as fixed annuities. Most people who can benefit from annuities have been bombarded by misinformation, biased opinions and outright lies. The truth is: fixed annuities are safe because they are guaranteed by insurance companies, a great place to keep retirement money because they pay tax-deferred competitive returns, and all of your money is working 100% of the time. Like all investments, fixed annuities are sometimes not suitable nor should anyone have all their retirement money in fixed annuities.
Many retirees live on income from their portfolio of stocks, bonds, mutual funds and other market-related securities. On October 09, 2007, the market [as measured by the DJIA] peaked at 14164.53 and then started a dramatic decline until March 09, 2009, when a trough of 6547.05 was reached. This 53.8% shrinkage played havoc with retirees’ portfolios and forced many back to work or slimmed down their lifestyles. If you had $500,000 at the peak and were withdrawing $25,000 [5%] annually to support retirement, the same withdrawal of dollars at the trough amounted to 10.82%. This alarming acceleration of the “burn rate” is why Congress suspended the required withdrawals from IRA accounts in 2009. Events of the Great Recession punctuate the dangers of investing for income. Let’s look at some details and a solution some retirees are using.
In what follows, taxes of 25% are assumed and an investment of $100,000 is used. The 1.5% bank CD earning $1,500 annually provides you $1,125 “take home income” after taxes. Thus, your after-tax interest rate is only 1.125% with the rest being paid to Uncle Sam in taxes. Of course, a lower tax bracket means your earnings will be higher, and vice versa. You can substitute your tax bracket and adjust the results accordingly. Let’s use a recently introduced technique called an “Income Annuity” (a garden variety deferred annuity equipped with a guaranteed life income rider) to see if we can improve on the results. But first a word about annuities!
The Great Recession has probably thrown your investments in reverse, and you’re hoping to soon “get back to break even”. Not only may this be wishful thinking, it is probably bad strategy – because this is the exact strategy that got you to the bottom in the first place. What’s more, your investments – and the market – may not cooperate by coming back. If your portfolio was General Motors, Ford, AIG, Citicorp, Lehman Brothers, WaMu, Frontier Airlines, Mervyn’s, Circuit City and other victims of the Great Recession, there is no “coming back”. Least you think the stock market’s recovery is certain, consider Japan’s Nikkei index. It was at 40,000 in 1990 and is now at 10,500. This can also happen in the USA: the NASDAQ index was 6,000 in 2002 and today is at 2,100. Granted, the market may recover longer-term, but in the meantime there are several complications.
You are saving money in your 401(k), 403(b), IRA or other retirement accounts so you can have an income in retirement. Unfortunately, “defined contribution” plans do not guarantee you a lifetime income nor do you get a guarantee against losses if you selected market investment choices. Most retirement-minded people would much prefer to have a defined benefit plan that guarantees a lifetime come; however, most companies no longer sponsor such plans because they are too expensive. But, wouldn’t it be nice to have this lifetime income guarantee like your father and grandfather? You can easily create your own defined benefits plan to provide guaranteed lifetime income. Here’s how!
As you are painfully aware, the before-tax money you’ve put away for retirement, and which has been growing tax deferred, has a co-owner: Uncle Sam. The tax laws say you must start withdrawing and paying taxes on this money when you reach age 70½. If you fail to take the Required Minimum Distribution (“RMD”) there is a penalty tax of 50% on the amount you should have taken and did not. The reason the government mandated the RMD is to assure they get their share in taxes before you expire. For 2009, the government will not impose a penalty for skipping the RMD, because withdrawing money would compound the market losses suffered by many. But, in 2010 you will again be required to withdraw from your qualified retirement money if you are 70½ or older. What can you do if you don’t want to take withdrawals?
If you had a plan for retirement, chances are it has been up-ended in the latest market meltdown. As I mentioned in this retirement blog, Retirement-minded savers and retirees that committed their hard earned money to the “market” have been on a roller coaster ride since 2000. First came the dot.com craze that drove stock prices to dizzy heights. The bubble burst and stock prices sunk dramatically with tech stocks as a group dropping 80%. From 2003 until late 2007, the market trended upward and came close to its inflation adjusted pre-2000 level before again plummeting dramatically. From late 2007 until March 2009, the market shrank by 50%, abruptly surged upward by 30% and for the past two months has vacillated around this plateau. Keep in mind that a 50% loss means a 100% gain is needed to get back to breakeven. Where will the market go from here?
The Roth IRA has existed for ten years but is under utilized by financial advisors and retirees alike. Converting your retirement money to a Roth IRA holds outstanding potential, but unfortunately many that need it most cannot qualify and most that can qualify have bypassed the opportunity. You can qualify if your total annual income is not more than $100,000. While higher income individuals cannot currently convert qualified retirement money to a Roth IRA, the income limit will be suspended in 2010. If you can qualify now, you need to immediately check into this opportunity. If you do not currently qualify, now is the time to start preparing for 2010 when you can. Following are suggestions you may find helpful.

