I was talking to a client whose Dear Old Dad advised that assets should double every 7 to 10 years. He also said she could do this while withdrawing 5% per year. This scenario was possible in her dad’s era. Unfortunately, it isn’t a likely scenario today. You see, my client’s father had a pension and social security. He also passed away before the stock market and interest rates changed. Her father’s statement assumed she would have a pension and that interest rates would continue to climb.
Unlike her father, my client does not have a pension. She retired at 56 and isn’t receiving social security yet. She does have a substantial savings and investment portfolio, but interest rates are no longer at 7%. The result is that her safe zone doesn’t pay as much as it did in Dear Ole Dad’s day.
Now back to that pension for a minute. Back in the day, almost everybody got a pension from their employer. You invested personal savings outside of tax-deductible accounts, so assets were totally liquid. In this scenario, your personal savings were invested at the local bank or stock broker’s office. Today things are much more complex.
If are lucky enough to have pension today, you can rely on that pension and social security for your primary income during retirement. This means you won’t have to withdraw as much from your savings.
Conversely, if you don’t have a pension, you are even more dependent on personal savings. And if your investments decline while making withdrawals, or if you remain too conservative, your money simply can’t grow. The result is a real risk you may deplete your savings.
If you don’t have a company sponsored pension, you may consider the purchase of an annuity. Similar to creating your own pension, annuities provide a consistent income stream. There are immediate annuities, fixed interest annuities, variable annuities, equity index annuities and a host of others. When you look at it the right way, an annuity can create an income stream you can’t outlive (for you and your spouse.) What is a lifetime income worth to you? How does that cash flow impact decisions that you make in the future? How does that income flow give you confidence in the future?
When considering an annuity, it’s important to remember each company offers different riders and provisions. Work with someone who takes the time to go over how various options work. You need to fully understand these products to determine if they are a good option for you.
There are many ways to approach retirement income, but making a good decision requires you to understand the facts. A really good article you may want to look at is Sequence of Returns written by Blackrock investments. It details the shift you’re making when moving from savings mode to withdrawal mode during retirement.
Another good read is by Dr. Moshe Milevsky a professor of finance at York University who writes extensively on Longevity and creating income for a lifetime. He wrote a paper titled Life Annuities: An Optimal Product for Retirement Income which is a bit technical but really lays annuities out mathematically.
Getting a Paycheck
There isn’t a one-size-fits-all formula to secure a successful retirement. However, getting a paycheck in retirement is a good thing. With pension-like cash flow plus social security and personal saving, you have more options and control. Retirement can last 25 or more years for many people, so having a predictable cash flow is extremely important.