Last posted by Holly Peterson | idahostatejournal.com
You spend your entire life saving and planning for retirement. Once it’s time to retire, you want to make the best decision for your savings. There’s so much information out there pulling you in different directions that it can often become confusing. Let’s look at how much money it would take today for you to generate $10,000 of annual income.
Savers aren’t risk takers; accordingly, their focus is generally on various fixed products that are in the market. The risk for the saver is the uncertainty of future interest rates. Looking at the current average interest rates from Bankrate.com let’s see what lump sum would be required to generate $10,000 of annual income. (See chart.)
Now let’s look at an investor who has a combination of bonds and equity investments. Based on numerous withdrawal rate studies that are available, assuming an asset allocation of approximately 50 percent bonds and 50 percent stocks. A retiree that withdraws only 4 percent of their portfolio each and every year has a likely probability that their portfolio will last at least 30 years. (See The Trinity Study)
Accordingly, if we use the 4 percent withdrawal rate, an investor would need to invest $250,000, to generate that same $10,000 of annual income.
Another consideration is that most of these studies are based on historical data. However, the fine print here should read, “past performance does not guarantee future results.” While there is every reason to believe that investment returns in the next 70 years will be similar to the previous 70 years, there’s little chance that it will be EXACTLY the same. To say that 4 percent is a “safe” withdrawal rate and that 4.1 percent will leave you broke implies a measure of accuracy in the forecast that just isn’t there. It may make more sense to say that the “safe” withdrawal rate going forward lies somewhere in the range of 3.25 to 4.25 percent.
Those aren’t your only choices though. Here are two alternatives that offer safety and guarantees, with minimal risks, all while requiring smaller lump sums:
1. A fixed index annuity with an income rider would need an investment of only $181,818 to generate $10,000 a year for a 65-year-old.
2. A single premium immediate annuity would take approximately $160,000 to generate $10,000 a year with a 10-year term certain for a 65-year-old.
The income from these two solutions would be guaranteed for the rest of the owner’s life, regardless of interest rates, market volatility or how long they live.
You can protect your retirement income in many different ways. You have worked hard for what you have. You deserve to make sure you have studied all the options available to you. Additionally, both savers and investors can benefit from using an income or single premium immediate fixed indexed annuity.