Who knew the holidays would result in a reordering of family financial plans? One minute we sit down for turkey and all the fixings, and the next we’re planning how to pay for the rest of our lives, along with a critical portion of our kids’ and grandkids’ futures.
What you were really looking forward to was one, or three, of those homemade rolls, but of course you enjoyed the family, too, and as a side dish, you came away with an understanding of how to build a solid plan for retirement income.
What we learned about our finances
In my previous article, A Plateful of Financial Topics that Might Come Up Over Turkey Dinner, I mentioned that the holidays are a good time to touch base on how everyone is doing financially. We featured a Baby Boomer couple who hosted two younger generations of family. The Boomers are thinking about downsizing, while their kids are looking to move to a lower-cost market for a new home purchase, and the oldest granddaughter (the first of five) is going to college in two years.
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Our couple has come away from the Thanksgiving holiday with a lot of information and many potential paths to consider. They want to address their new concerns about how inflation might affect their personal expenses, whether they have enough money to create funds to contribute to a 529 plan for grandkids and how to help their kids buy their next house. At the same time, they want to support their current lifestyle and pass on the same legacy. Sounds pretty daunting.
Plan from 2017
The plan for retirement they might have adopted when they retired right before Thanksgiving 2017 was based on what we call the rules-of-thumb method — use only investment portfolios, set 4% as starting income and invest 100% minus your age in the stock market. That plan, based on $2 million in savings, generated $82,000 in starting income and, taking into account payments from Social Security and a pension, delivered the following.
- Starting income from savings with 2% inflation protection: $82,000
- Starting income from Social Security benefits and pension: $86,000
- Total starting income: $168,000
- Legacy at passing at age 95: $2 million
- Margin for 529 and new house purchase: $0
How does the plan look today?
Adjusting for the reality of 2023
A new plan created with the Go2Income planning method before last month’s Thanksgiving could produce a 32% in starting income to $108,000. However, after what they heard about what the next generation needed and seeing how much their SSB and pension payments had increased (26%) they adopted a plan with a smaller increase that met everyone’s current objectives:
- Starting income from savings with 2.5% inflation protection: $88,000 (up 6%)
- Starting income from Social Security benefits and pension: $108,000 (up 26%)
- Total starting income: $196,000 (up 17%)
- Legacy at passing at age 95: $2 million
- Set aside from retirement savings for next generation’s expenses: $250,000 (529 contribution and helping with the purchase of the kids’ next house)
That’s a lot of additional benefits in the 2023 plan. Just as in 2017, our couple started this plan with $2 million to invest. Here’s what’s happened since 2017 to enable their much-improved plan.
Sources of improvement 2023 vs 2017
Annuities. Six years ago, there were income annuities, of course, but there was no Go2Income planning to find the best way to incorporate these annuities into your plan for retirement income. Annuities provide safety and reliability, no matter where the interest rates sit, but with today’s higher rates, you can generate higher annuity payments. That creates more possibilities for adding, or laddering, your annuity payments even into your 80s, ensuring a higher level of steady income for the rest of your life.
Age. The Boomers were also six years younger in 2017. With the maturity of older age, they have an even better idea of what they want to do and how much money their plans will require. Most important, the income for a lifetime annuity that starts today is more than 10% higher just because of higher ages.
Increased interest rates. Interest rates on annuities are at their highest levels since 2009, and that boosts the payments on a newly purchased income annuity. The increase, as reported in my article Annuity Rates Are 30% to 60% Higher: Time to Reconsider, speaks for itself. Just as with the stock market, no one can reliably time peak prices. Now is a time, however, to seriously consider adding annuity payments to your plan. To get a quote, visit Go2Income.
Higher allocation to equities. With the safety of additional annuity payments, you can take more risk in your investment portfolio. Stocks will always go up and down, but you know the history: Over time, the stock market usually increases in value.
Higher Social Security payments. The COLA (cost-of-living adjustment) protection on the Social Security benefits and pension payments was very important, giving them the confidence current expenses were well covered.
Overall, the grandparents’ new plan appears to be more generous, but it just shows what new planning and higher interest rates can do.
Spending the improvement in income
As I suggested above, rather than increasing the starting income from a new Go2Income plan by 32% from 2017, they decided to adopt a more conservative plan for themselves by targeting a 6% increase in starting income while providing 2.5% per year in future inflation protection and $250,000 outside the plan for 529 contributions and help with a new house purchase.
A new issue and possible solution
Everyone was feeling pretty good after Thanksgiving Day, but as soon as they got home, they read the article Why Long-Term Care Insurance Falls Short for So Many in The New York Times. The article confirms what you may have suspected: Long-term care insurance is expensive and hard to get. Insuring against the very high risk of significant health care needs later in life is part of a good plan. Assuming you would pass the medical exams and qualify for LTC insurance, the cost may give you pause.
The family at the center of this holiday story hadn’t yet considered an option that might help: home equity extraction, which could address an expense like long-term care and preserve the financial legacy they plan to leave to their family.
We’ll be writing more about this in the future, but the two benefits from a home equity conversion mortgage, or HECM, also called a reverse mortgage, are:
- Additional cash income to pay for things like LTC premiums or other costs
- Additional liquidity later in life if you pay interest on your HECM
There’s another benefit from the federal rules that keep the homeowner from losing the house even when the equity is exhausted.
I’d love to hear your opinions, and questions, on home equity extraction and how you might use it. Please message me at Ask Jerry with your thoughts and questions.
Keeping your perspective
It’s easy to feel overwhelmed when you have multiple objectives and, in fact, to forget the basics about a strong retirement income plan.
With the right planning and the right adviser, our couple can find support for all their needs and perhaps all of their wants, too.
Right now, you may be asking, “Where’s the gotcha?” Most of us assume we have enough money for the retirees in retirement, but not the rest of the family. The plan described for our family above, however, sets up the grandparents with plenty of income for life, with the same legacy they had planned six years ago, and with extra money to spend on the kids and grandkids.
Remember, the New Year’s holiday is coming up. It may be the perfect time to put a new plan in place. Visit Go2Income to consider your options and develop a plan that satisfies you and your family.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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