The Biggest Need for Retirees: Income Planning

The Biggest Need for Retirees: Income Planning
June 3, 2013 Pat Berg

Life changes and times change.  My grandfather never really had a concept of retirement.  When he was young, he worked hard as a cow-puncher, and then became a hard-working, circuit-riding, Methodist pastor. The love of his life, his wife Mildred, suffered from a brain tumor that took her life in 1969.  He missed her terribly.  He lost a son in the ‘70s and it almost crushed him.  But, grandpa was an incredibly strong man with an incredibly strong faith.  When he was too old to teach any more Bible studies and preach anymore sermons, he retired to an assisted living facility in Bozeman, Montana.  There he passed away in the fall of 1980.  He was a great man.  A truly great man!

You know, that is how a lot of our grandparents were.  They didn’t really have a concept of retirement.  They worked hard and when their eyes darkened, their backs weakened and their hands couldn’t grip anymore, they stopped working, sat down… and died.

The concept of retirement in America grew out of the reforms made in the great depression; the most significant of course was Social Security.  In 1933, Congress passed the Social Security bill that enabled people who were age 65 to receive income checks monthly from the government starting in 1935.  It was originally intended as a supplement to income for the elderly, yet has turned into the major source of income for many retirees.  It is interesting to note the average retirement age in 1910 was 74 years old, and the average in 2006 was age 62.  This is most likely the case because 62 is the age when people can begin to receive early Social Security.  The reality is that it’s most often a mistake to take early Social Security. It can be a great advantage to wait, even to age 70, if possible.  Ask your financial advisor about this and the some 400 different ways to start and claim Social Security.

According to government actuarial tables, a male age 62 is expected to live to just about 80 years old.  If he reaches 75, he’s expected to reach age 85, and if he reaches age 85, he’s expected to live until age 90 plus.  Women of those ages (never ask though) are expected to live another year and a half to two years longer than their male counterparts. We are living longer, and it is definitely putting pressure on finances, both personal and for the government as well.   Imagine a government trying to fund retirement for millions and millions of Boomers over the next 30-50 years.  Not just Social Security, but Medicare and Medicaid could be headed for real trouble.

Yet, your job is trying to provide enough of an asset base to last through retirement.   If you are retired, your job is to make the money last through retirement.  Tough job!  It seems like this should be easy.  You make money, you save money, and you spend it in retirement. Simple, right? Not exactly.

We are talking about making money last for at least three decades.  What lasts three decades anyway?  Plastic water bottles?  Marriage?  Well, considering a divorce rate of over 50% and spouses who pass away prematurely during retirement, maybe not.  These can be painful realities as we head into what is supposed to be our “Golden Years.”  The water bottle outlasts our marriage and our money.  Something isn’t right here.

Still, life happens, and as I said, it happens for three decades on average in retirement.  The highs and lows.  The arthritis and dementia. The grandkids and poodles.  Three decades of life all of which we have to fund.  While there is so much more to enjoying retirement than money, if you screw up the money it has a dramatic impact on all the other aspects of those Golden Years.  In fact, if you screw up the money, you may have to go to work at the Golden Arches!

What’s the answer?  Though the DOW has recently reached all-time highs on its three-year Bull run, it’s due for a correction.  How do you plan for income that will last in what might be another long, protracted Bear market?

One of the keys is having a portion of your retirement income, other than Social Security, guaranteed.  This is where the value of fixed principal assets like annuities comes into play.  A person can convert some of their retirement accounts to annuities, which can create both income options much like corporate pensions.  One of the great financial innovations of the last 20 years is something called a guaranteed withdrawal benefit (GWB) that comes attached to some annuities.  These GWBs allow you to have a structured payment much like a pension payment, but keep the option of having your cash value grow at the same time.  These are becoming quite the talk of the financial community, and you would be wise to investigate how they could provide income security for your retirement.

I suggest you give your advisor a call and ask about creating a retirement income plan that gives you income from various sources, like Social Security, IRAs, Roths, and annuities with guaranteed withdrawal benefits.  A little diversity in your income plans might just be the ticket when this Bull market ends.  And it will end.

I think my grandfather would have liked a few guarantees. How about you?

 

The Retirement Pros
June 2013

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