Are your clients gambling with their retirement income?Article added by Michael Pinkans, CFA on June 3, 2013
Ranked: #208 (235 pts)
"Those who cannot remember the past are condemned to repeat it."
— George Santayana 1
Over the past year, the Dow Jones has risen approximately 22 percent.2 Does this mean the U.S. has successfully navigated through the financial crisis of 2008?
While speaking on a business news channel the other night, a "market-watcher" was asked why the market has gone up so rapidly. Her response: There's nowhere else to put money.
So, have we really solved our financial issues? Of course not. There's been no entitlement reform, and no real deficit reduction strategy has been implemented. Unemployment is still far north of 7 percent, and the Fed is still pumping money into the economy, but money has continued to flow into the equity marketplace.
Should everyone follow the herd mentality and go "all in" with the market? Absolutely not!
Certainly, having long-term equity investments may be a good thing, but we are faced with 10,000 baby boomers turning 65 every day, which translates to 76 million people either currently in retirement or rapidly advancing towards it. It is up to us to make sure their goals can be satisfied.
Specifically, up to 60 percent of your clients' retirement income should be in the form of guaranteed income to cover guaranteed expenses such as food, utilities, taxes, mortgages/rent, insurance premiums, Medicare supplement programs and out-of-pocket health care costs.
Can the equity marketplace guarantee income? Unfortunately, the answer is no, it can't.
Consider this case study:
Margaret, age 50, just changed jobs and has to decide what to do with the $100,000 she currently has in her old employer's 401(k) plan. She could leave the money in the current plan and keep the equity allocation, or she could move the money into a fixed income annuity (FIA) with a guaranteed income rider in a self-directed IRA.
If she moves the money into a FIA, her guaranteed income starting at age 65 is over $13,800.3 These contracts also include an assortment of versatile features, such as premium bonuses, annual free withdrawal amounts, nursing home/confinement waivers and terminal illness provisions. These options provide flexibility to Margaret that surpasses what can be offered by her current 401(k) plan.
If she left the money in the equity market, and assuming she believes in the 4 percent rule4, even if her investment of $100,000 today tripled to $300,000 by age 65, she would only start withdrawing $12,000.
Not to mention the fact that the rule itself is being debunked. The Wall Street Journal, in a recent article, "Say Goodbye to the 4% Rule," throws the rule into question. And their recommendation for an appropriate alternative? You guessed it — annuities.
Boomers who are seeking guaranteed income to address guaranteed expenses in retirement would do well to ignore the herd and consider products that provide the income they need, when they need it. For those that are currently retired or those that are approaching retirement, either an FIA with an income rider or an immediate fixed annuity (offering a guaranteed payout) is probably a better choice.
1 George Santayana's "The Life Of Reason" Vol. 1 "Reason and Common Sense." Chapter 12 "Flux and Constancy in Human Nature." Charles Scribner's Sons (1905).
2 Ending Values DJIA 5/24/12 - 12529.75, 5/23/13 - 15294.50
3 Calculated as of 5/29/13 via Insware Design Group's Income Rider Choice Pro Guaranteed Income Analyzer
4The 4 percent rule states that an investor should be able to take 4 percent from her savings the first year of retirement and then that amount plus more to account for inflation each year, without running out of money for 30 years.
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