By Joseph Gutierrez
Ten thousand Americans turn 65 every day and stare in the face of retirement and wonder how they are going to get through it. What we have found is that incoming and current retirees are looking for guarantees and safeguards for their retirement income, in ways that only insurance based products can provide. There are plenty of uncertainities and risks in our day and age, from economical to cultural to geo political risks. Events can change the calculus of retirement at the drop of a hat. Even still, our retirement needs remain and the necessity for stability is more important than ever.
We’ve identified the 3 levels of retirement income planning and highlighted it here in our Ebook, Retirement Ready. In our experience, we have seen that incoming and current retirees need help in 3 key areas, emphasized by the Retirement Ready triangle.
First level is Guaranteed Income. If we don’t have our income in order we are going to have problems. It’s the base of the triangle for a reason. We’ve spent the better part of our career and working lives preparing to move into a sustainable retirement. Unfortunately, traditional and generic retirement strategies leave much to be desired. You’ve probably heard of it, the fabled 4% rule. The main issue with this approach is that for many, it’s simply not enough money to match their current life style. 1 million of savings only translates to 40,000 of annual income. For many that live a 100k plus income working lifestyle, this is a very abrupt income change. Additionally, and somewhat tragically, the 4% rule is based on a false premise, putting safe withdrawal needs against an ever changing and highly volatile stock and bond market. History says that retirees who put all their hopes in the market carrying them safely through retirement have periodically been disappointed and sometimes devastated. If the market hiccups, every retiree feels it and reacts by restricting income and adding stress. Look back at the decade between 1999 tech bubble to the global financial crisis of 2008 and 09, often viewed as the lost decade. Retirees had their retirement income plans essentially cut in half and went through the stress of watching their assets deteriorate as they take income to live. This is an example of what’s known as known sequence of returns risk and it’s a very real risk indeed. Not only that but with the 4% rule, we can run into substantial longevity risk. What if we outlive our assets? Can we afford to take that risk? The 4% rule gives us no guarantees and we essentially fly blind through retirement.
All of these worries and uncertainties are unnecessary as our Retirement Ready plan includes Guaranteed Income through insurance based products like SPIAs Single Premium Immediate Annuities, DIAs Deferred Income Annuities and FIAs Fixed Indexed Annuities with the income rider. Through these vehicles we have a guaranteed payout for us, and if desired a joint policy with our spouse, that will keep paying as long as we live. Not only that but we have significant better payout rates roughly double compared to the standard 4% rule. And, if we structure an annuity product early and defer for a few years, we could see our effective payout rate go from 7+% to 10% to 13% or even higher. And we have a whole library of the best carriers and quoting tools to get the top payouts. When it comes to retirement income, it’s a need not a want. And retirees need assurances that 100% equity and bond portfolios simply can not give. Guaranteed Income, it’s the base for a reason.
Our next level is Health Security and Legacy. This level is the hidden worry that many pre and current retirees have in the back of their minds but hesitate putting it into words. What if I or my spouse gets sick and needs care? Will I be able to financially support that? Statistically 70% of us will require long term care due of a chronic illness. And let me remind you, Long term care costs can be substantial. Think 6, 10, 15 thousand per month just in additional long term care costs. Many times we find that clients initially want to put this off, thinking that they can just self fund and worry about it another day. I hate to be the barer of bad news but self funding only compounds the hardship. Beyond the emotional toil, retirees end up having to drain their savings dry just to somewhat keep up with the long term care costs. And don’t forget, drawing from your qualified IRA funds also means paying substantial taxes. So if we need 10k a month for long term care, our actual draw may be closer to $14,000 a month with taxes factored in. That’s an additional draw of $168,000 a year on top of your normal living expenses. We see Long Term Care needs last about 4 years on average but often with the case of degenerative mental illness, it’s fairly common to see 10 years or more of Long term Care requirements. Often times retirees end up draining their savings at alarming rates with no other backup plans outside of help from family. Children of their aging parents then need to halt their lives and step in to financially and physically to support their parents long term care needs. I personally went through this growing up and I can tell you it’s physically and emotionally exhausting. It’s one of the hardest things retirees and their families have to go through and like we said, it happens to 70% of us at some point.
Luckily there is a solution that covers long term care as well as general liquidity and legacy planning. Our preferred method of combatting this very real risk is utilizing asset back long term care insurance through life insurance based products. These types of policies give us multiples more than the policy face amount in the form of our long term care benefit pool. This benefit pool allows us to draw from it, tax free once we qualify through a health care professional for the LTC event. This gives us significant supplemental income to hire healthcare professionals and purchase needed medical equipment. There are even policies that have an unlimited benefit pool to draw from. These are great to structure joint LTC policies for couples in retirement. This gives the retirees security and independence with home health care, custodial care or more advanced care needs. Not only that, but because its life insurance, whole life or universal life, we also build a reserve account of additional tax deferred and growing liquidity called cash value. This cash value can be drawn from in a pinch for emergencies or any other need that comes up, paid out inside of a week. And remember because it’s life insurance, if we never end up needing the long term care, our beneficiaries receive a sizable death benefit payout, all tax free. That’s the legacy part. For our clients, when things get tough, these specialized LTC policies come through and make hardships much more bare-able, for them and their families. Health Security and Legacy, it literally saves family fortunes.
Our final level is Accumulation. Whether we are working or in retirement, we should be continually growing our wealth. Inflation is always a significant concern for retirees. And getting a return on our money is vital to making our retirement comfortable in affording whatever the future brings. The issue is, like our guaranteed income scenario, the stock market doesn’t have to cooperate. It’s been a minute since our last major recession and numerous financial professionals have been sounding the alarm that a significant market downturn is on the near horizon. Name your favorite economic risk. Increasing interest rates, private credit bubble, artificial intelligence malinvestment, national debt concerns, stock market overvaluation, geopolitical conflict risks, high potential gas prices, the list goes on and on. Any one of these can tip the scales and cause our financial nest egg to reduce, 30 , 50% or more all at once. The common expression is the stock market takes the stair way up and the elevator down. In retirement we want a reasonably good return but we shouldn’t and frankly can’t afford to get caught in a downturn. We don’t have the time to recuperate like in our younger years.
Good news is that all of this can be avoided through accumulation based insurance products. We like MYGAs multi year guaranteed annuities for guaranteed interest rate completely isolated from market disruption. Today, we are seeing MYGA rates in an attractive 5% to low 6% range. Additionally, since interest rates have normalized higher, a number of our clients are taking advantage of accumulation focused FIAs Fixed Indexed Annuities that mirror market returns while providing principal protection. Some of our clients grow for a period of years and annuitize later, some structure their FIA as accumulation then flick the switch for annual increasing income payouts, and others accumulate indefinitely, drawing on their account on an as need basis. I often say, conservatively, we see 6-8% tax deferred average annual returns on our FIAs but lately I’ve been seeing examples of 10%+ for some of my clients. High interest rates may hurt home affordability but pre and current retirees are taking advantage of these rates inside of FIAs that help give exceptional returns without the market risk. And when I say no market risk, I mean that market could take a total dive and lose 50% in a year but our principal account value remains untouched, ready to reroll and capitalize on the bounce once the market starts to recover. During the next recession, while your neighbors are selling their car or boat, with FIAs your account gains will remain intact and ready to grow again during the recovery. Safe Accumulation, principal protection is paramount.
As we can see, all 3 layers of the retirement ready strategy work harmoniously with each other to give us the protection and guarantees that we need to take on the next step in retirement. You’ve worked hard to get to this point, now it’s time to insure your retirement and give yourself the peace of mind that you deserve. Be sure to get your free Retirement Ready Ebook. And if you’re interested in putting together your own custom plan for retirement, click the link in the description, it will take you to our website where you can book a free online consultation. We never charge for consultations, and the first one is all about understanding your needs for retirement. Afterwards, we design a custom plan to tackle your retirement risks and position you the best for the years ahead. Every plan is different just like every client is different.
Ultimately our job as insurance advisors is to point out the risks we see in your current trajectory and give you the most cost efficient options to mitigate risk and prosper safely. Some of our clients only get one piece of the triangle and let the rest ride in the market, others want every one the 3 layers accounted for in a complete retirement income plan. Our job is to provide a solution to a problem, give guidance, provide ongoing client support and let you make your own decision. If you’re interested in putting together your own retirement income plan, I encourage you to click our Book Now button for a free online consultation.