I have been working a long time on retirement planning that creates more and safer income for retirees. So long, in fact, that I sometimes forget the subject is new to most investors. They get much of their financial information from their advisers — who often simply treat these investors as “de-accumulators.” Another way to describe their message is, “Invest like you did when you were 55, only more conservatively.” In my opinion, that is not helpful guidance.
Please consider this article as a reference tool on a new way to plan and manage your retirement that you can come back to periodically to refresh your understanding. By the end of the article, I hope to answer your basic questions about the new Income Allocation planning and how it can benefit you with a more secure retirement.
Income Is the Foundation of Your Retirement Plan
Most eras in history are unsettled, but it sure seems we’ve got a lot going on now, and much of it makes us uncertain about how to plan for the future.
Interest rates are low and are expected to stay low for an extended period. The markets are volatile, making “stay the course” a particularly gut-wrenching choice. Add a pandemic to the mix. As you prepare for — or enter — retirement, you want to be able to celebrate. That means satisfying your desire for a self-sufficient lifestyle (while anticipating expenses such as unreimbursed medical or caregiver costs, or the premiums to cover these costs) even as you spoil the grandkids.
And that means income. A good retirement income plan is one that allows you to enjoy your retirement and provide the necessary cash flow that will create peace of mind.
Build Income Certainty into Your Retirement Plan
For the past several years I have been working to educate consumers about the pitfalls of typical Asset Allocation planning for retirement. That is the name for an approach to investing and retirement spending that leaves you with the risk of running out of money. Asset Allocation by its name allocates your savings among a range of investment categories — stocks, bonds and cash — then tests to see if that “plan” can deliver a desired level of income to your age at passing. There is rarely a distinction between dividends, interest, capital gains and withdrawals of capital — and the tax effects thereon. And, of course, what happens if you outlive your plan?
I advocate starting with a focus on income, and specifically allocating your sources of income among dividends, interest, withdrawals from your IRA and annuity payments. The annuity payments (replacing the pension that doesn’t exist for most new investors) are guaranteed for your life, are backed by highly rated insurance companies and complement your Social Security payments.
Why Annuity Payments? Why Now?
Income Allocation is not simply the act of adding annuity payments to your retirement mix. Instead, it integrates annuity payments with your other income sources to provide the most income with the lowest taxes and fees — and the lowest risk — to allow you to enjoy the rest of your life.
Some advisers say annuity contracts are too complex. They often confuse income annuities, intentionally or not, with index or variable annuities. (In fact, I introduced a “living benefits guarantee” to the variable annuity business leading in large part to its growth as a $1 trillion industry, and so I know the difference.) Advisers may want to talk about an annuity’s high fees and confusing crediting rate formulas; once again these are not features of annuity payment contracts. These contracts are really quite simple: Guaranteed payments are deposited monthly into your savings or checking account while you are alive, and optionally while your spouse is alive, or to a beneficiary if you pass before the investment is paid out. A good annuity agent shops the market of highly rated companies to get the highest income for your investment.
Annuity payments purchased with after-tax savings receive a tax break, and at some combinations of age and gender 100% of the income is received tax-free for 15 or more years, making them even more attractive in today’s low interest-rate climate. (See my article on tax benefits.)
Here is an example (as of September 2020) of the after-tax cash flow advantage for a woman age 70. Annuity payments for this typical investor with $1 million in savings are:
- $45,000 to $54,000 higher than interest on 20-year U.S. Treasury bonds
- $42,000 to $50,000 higher than interest on 20-year investment-grade municipal bonds
- $30,000 to $39,000 higher than interest on 20-year investment-grade corporate bonds
Of course, annuity payments should make up only a portion of your retirement income and should be considered as a substitute for some fixed-income securities. While the tax benefits of the annuity payments wear off after the initial period, there are still cash flow benefits.
The safe income from annuity payments allows you to allocate more of your savings to stocks, while decreasing the worry that daily, monthly or even year-long market swoons will decrease your cash flow.
How to Create Your Own Income Allocation Plan
As we talk to clients about their experiences with advisers, in most cases the adviser is focused on an investment product or two rather than on building a plan for retirement income.
So, it makes sense to educate yourself and make sure your adviser understands your questions. As I said above, an Income Allocation plan is made up of dividends, interest, withdrawals from your IRA, and annuity payments. And no matter how skilled and willing your adviser is, you will need to provide information about your specific goals, including:
- What are the objectives for your income?
- What percentage of your savings will you devote to retirement income?
- What is your (and not the adviser’s) outlook for the long-term return from the stock market?
- Do you want all your income to continue to your spouse or other beneficiaries if you pass first?
- Do you expect to need more income late in retirement to cover unreimbursed medical or caregiver costs or premiums for such coverage?
Once you settle on your goals, and find an adviser who understands annuity payments, you may not be finished. The integration of annuity payments into your plan for retirement income requires specific expertise.
Knowing How to Integrate Annuity Payments into a Plan Adds Huge Value
Here are a few questions your adviser should offer guidance on when you mention Income Allocation and income annuities:
- Which types of income annuities and which features do you recommend?
- Which savings accounts should be the source of my premium payments?
- Which annuity carrier(s) should I consider?
- How should the inclusion of income annuities impact my allocation to other fixed income investments? To stocks?
- What is the impact of an Income Allocation model on my total income? Starting income? Projected increases?
- How does the plan adjust to changes in market conditions and my personal circumstances in the future?
Go2Income has built the tools and know-how to help you with this entire process.
Next: Making It Work
The answers to the questions above will give you a good starting point for implementing a plan that provides income to meet your goals. These answers will help you decide how large your annuity payments should be and from which insurance companies. You will determine how much income to plan on from dividends, interest and withdrawals. And your plan will show you clearly how to combine income from investment sources and annuity payments to provide a lifetime of increasing income.
That is not the end of your work, however. You will tell your adviser that you intend to take a look at your finances at least annually and readjust when necessary. It will be necessary at some point. The health of the market and your family, a move to a smaller home — even a pandemic — might cause you to rework your plan.
You Can Do It
My wish is that all advisers will follow the views of their clients and work to convert their savings to more income with less risk during retirement. Many advisers will have to go back to school to learn all that you have taught yourself, and others won’t want to.
One option is to contact Go2Income. I invented Income Allocation planning to help everyone plan for and retire comfortably. You can start by filling in some simple information at our Go2Income site.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.