Retiring at last. You have earned it by every measure. But now, you face an important transition in your personal financial plan. You have finished accumulating retirement assets and are now beginning to distribute them as income to support your retirement lifestyle. The choices you make now can certainly impact your long-term financial situation.
Preserving Your Assets
Building a systematic withdrawal plan around a sustainable withdrawal rate is a smart effort for making your money last, but it may not be enough. Assume you have a retirement portfolio worth $1 million. Initially, annual withdrawals of 5% ($50,000) seem conservative. You may be surprised to learn however, that at that rate there is only a 90% chance your money will last just 20 years. In other words, one in ten people following this seemingly conservative withdrawal strategy could potentially out live their retirement nest egg later in life.
In addition to careful consideration of withdrawal rates, retirees must be aware of the significant risk market volatility poses. Erratic swings in equity-based investments can decimate portfolio values without warning – seriously threatening potential future income since percentage-based withdrawals shrink as total assets are eroded.
Holding onto what you have – asset preservation – is a top priority for retirees. Though you may not know how long you’ll live, you do know that running out of money is not a scenario you hope to experience. If only there were guarantees… The good news is: there are.
Get Guaranteed Life-long Income
A Guaranteed Lifetime Income Annuity is a financial product that does, in fact, guarantee life-long income. To illustrate, imagine that same hypothetical million-dollar portfolio. From it, you could use $842,334 to purchase a Guaranteed Lifetime Income Annuity, which will provide the $50,000 per year of income you had planned to live on. But, this $50k is now guaranteed for as long as you live, regardless of market performance. No more worrying about outliving your savings. Plus, you would still have $157,663 left in your portfolio to access as you wish, making the Guaranteed Lifetime Income Annuity significantly more efficient than a simple withdrawal strategy.
In case of premature death, the Guaranteed Lifetime Income Annuity has a Cash Refund option, which returns to beneficiaries the difference between the initial premium and whatever has been already paid out. If inflation is a concern, an Annual Increase Option can be added to the annuity contract at purchase — initial annual payments would start off smaller, but increase each year between 1 – 10% according to the owner’s preference. Over time, the total annually adjusted payouts would potentially provide more income than their unadjusted counterparts.
This educational third-party article is being provided as a courtesy by Laurie Madenfort, Agent, New York Life Insurance Company. For additional information on the information or topic(s) discussed, please contact Laurie Madenfort at (561) 706-7676.
1 Source: Internal New York Life analysis. Hypothetical example of assets held in an untaxed account of $1,000,000. Systematic withdrawal plan rates, and associated portfolio duration based on hypothetical allocation between equities and bonds; 125 basis point annual fund management expense. This illustration is based on a Monte Carlo model simulation of 1,000 scenarios each of correlated equity and bond returns using an economic scenario generator. Correlations estimated using historical monthly S & P 500 Index and Barclay’s U.S. Aggregate Index returns over 20 years (1989-2009). Equity and bond returns are assumed to be normally distributed. Each withdrawal rate is adjusted annually for 3% inflation. This model is intended to be an indicator of potential returns at various confidence levels and is not designed to be a forecast of future investment performance.
A Monte Carlo simulation analyzes probabilities and seeks to identify the number of years your profile will last, given your financial profile. The simulation is hypothetical, does not reflect past performance, and is not a forecast of future results. Simulation results may vary with each use and over time. Each client’s results depend on individual factors which a simulation does not account for, such as how investment decisions are implemented in reality and the costs of investing. A simulation may not capture how asset classes fall in and out of favor over time. These factors can influence a client’s results materially.
2 New York Life’s Guaranteed Lifetime Income products are issued by New York Life Insurance and Annuity Corporation, (A Delaware Corporation), a wholly owned subsidiary of New York Life Insurance Company. Guarantee is based on the claims paying ability of the issuer. Product available in jurisdiction where approved.
3 Payout based on female, 75 years-old, Single Life with Cash Refund payout option, with 3% Annual Increase Option as of 10/31/2011. Payout amounts vary depending upon age, gender, premium amount, payout option selected and interest rates at time of policy issue. In general, income annuities have less liquidity than investment portfolios. Guarantee is based on the claims paying ability of the issuer. Payments consist of interest and return of premium.
4 Must be selected at time of purchase, policy owner must be at least age 59 ½ at the time of the first payment. Other restrictions may apply.
In most jurisdictions, the policy form number for a New York Life Guaranteed Lifetime Income Annuity 1CC11-P102. State variations may apply.