Most clients we meet understand that they need to have a plan of action heading into retirement. After all…the “accumulation” phase is over, and now it's time to pay yourself back. The truth is that “decumulating” an asset safely is a far trickier landscape to navigate, and in a low-interest economy, it can be downright dangerous.
Successful Income – The Unknown Frontier
We firmly believe that the most “successful” retirees in the future will not be good investors but rather be wonderfully calculated SAVERS. In fact, the myriad of opinions from the thousands of industry experts offering advice on how to invest in the retirement income market have proven to be dead wrong time and again.
Thirty years ago, Social Security and Pension benefits were the basis of a person’s comfortability in retirement. If they DID have any personal savings, that money served as an occasional supplement. As our government has perpetually overpromised and underdelivered, borrowing money from the SSI pot, and corporations have fled the pension promises in order to remain financially viable, more than 2/3 of the baby-boomer population has been asked to survive on the balance of their 401(k) plans and IRA accounts.
This is, of course, the largest sales opportunity for stockbrokers and financial advisors of all time. “Income” is the buzzword, and someone always has a magic bullet to achieve it.
According to Morningstar, folks who withdraw 6% annually from a stock/bond portfolio for income will run out of money over 50% of the time before life expectancy. Why?! Strategic Annuity designs can ensure that the appropriate amount of income is guaranteed for the entire life span of you AND your spouse. Stock market gurus who’d love to see the fees keep rolling in often criticize these products, but the proof is in the pudding. Most people would much rather have a guaranteed pool of funds than perpetual heartburn as the markets go up and down. The point is…. there is no shame in being conservative, and there is a time and place for a great annuity product in your portfolio.
This is where the much-maligned Annuity comes into play. Do you collect SSI? You own an annuity, basically. Of course, if you die before declaring income at 62…you essentially paid into the system for zero return. How about a Pension? Same story, but the corporations making the promise of a paycheck don’t have the power of taxation behind them to mitigate an unforeseen problem.
The solution?
At Principium, we firmly believe in the merit of a properly structured annuity and happily design portfolios around them. Unlike many, we do not over-fund annuities, making them the Lion’s share of a nest egg…rather build them to protect and distribute the funds that CANNOT be lost.
How about income from the market?
Absolutely!! Great dividend stocks, certain bonds, and treasuries can provide a sustainable income each year, especially when paired with SSI, annuity income, and pension plans. We have to be more careful than ever to monitor risk vs. reward, however, and since 2008 have seen tremendous value in utilizing an appropriate blend of guarantees in EVERY portfolio.