It's Time to Redefine Retirement for Retirees With $500,000 to $5 Million: Here's How

Editor's note: This is the first article in a five-part series about all-asset retirement planning that will cover such topics as using annuities and housing wealth, making the most of tax benefits and establishing an investment strategy.

Wouldn't it be wonderful if we could hit retirement and let all the money we saved over the years, plus the Social Security benefits we earned, do the job to keep us comfortable and without worry or stress — for the rest of our retirement?

Yes, it would. But that's not how retirement works. Today, we don't know whether our Social Security benefits will survive without cutbacks.

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We're living longer (yay!), but that means we might incur thousands of dollars in expenses for health care in later years.

Our kids are staying at home longer and need more help when they leave.

And if the stock market tanks (or simply underperforms relative to the past few years), a lot of that money we built up disappears. Or forces a drastic change in plans, such as selling the house you planned to live in for the rest of your retirement.

In this article — the first of a series of five — I pull back the curtain on how we've addressed retirement concerns for the large segment of retirees with $500,000 to $5 million in assets.

We call them "mass affluent," and though they are well-off, they can't live on investment income alone, as the high-net-worth folks do.

They need a different approach to maintain the house and take care of long-term care costs and ever-increasing health care expenses without taking too much risk and paying too much in taxes.

That's our market, and those are the retirement goals we set in our planning.

Looking at all assets

We started with the premise that the more asset class options a planning system has, the more likely that it will produce better results.

Until recently, most people — investors and advisers alike — would say that a well-diversified and prudently managed portfolio could solve every retirement issue.

As we found through testing (and with confirmation from AI), no single asset class, no matter how diversified, can efficiently address all risks at once. Retirement is a risk-management problem that involves longevity, liquidity, taxes and timing.

The challenge was to find the set of asset class options that can be personalized, made understandable and modeled based on reasonable assumptions.

You can see how this approach developed by reading a portion of the more than 100 articles we've published on Kiplinger.com. Or you can go over the history below.

Longevity protection

Besides being an investment adviser, I'm an actuary by training, run an insurance agency and have two patents around lifetime annuities. So, I believe in the original form of annuities that guarantees income for life.

In fact, one of my first assignments as a junior actuary was to price an immediate annuity, which mainly involved picking a mortality table for the average annuity buyer and working with the investment department to match the annuity's assets and liabilities at sustainable interest rates.

It was an important assignment since my employer — an insurance company — was guaranteeing the payments for life.

Not a lot happened in the lifetime annuity field for a while — with most activity in deferred annuities, which are like tax-deferred investments.

But about 10 years ago, the government authorized a qualified longevity annuity contract (QLAC) that offers a way for retirees to guarantee lifetime income.

A QLAC lets a homeowner use a portion of their rollover IRA savings (up to a little more than $200,000) to purchase guaranteed income starting at a future date no later than age 85.

Not only is the retiree deferring taxes on required minimum distributions (RMDs), but there's also a huge longevity benefit. In today's market, a 67-year-old man who allocates $100,000 to a QLAC will receive a guarantee of $50,000 a year for life starting at age 85. (One other QLAC feature is the ability, within limits, to accelerate the income to an earlier age.)

What we did with this valuable longevity protection and tax benefits was to include a QLAC as a key part of the all-asset retirement plan, using our proprietary QLAC allocation system.

Liquidity as needed

Liquidity — access to cash or assets that can be quickly converted to cash — often poses a problem for retirees and is a planning issue we've grappled with, too.

Is the answer to keep thousands in a bank account until needed? Cash out an IRA to pay for long-term care expenses, which today average over $400,000?

Those approaches are expensive, and they fail to provide flexibility or total peace of mind.

That's why we began an analysis of the home equity conversion mortgage (HECM). This is a reverse mortgage insured by Housing and Urban Development (HUD) with protections that allow the primary mortgage holder and spouse to remain in the home for their entire lives. (The homeowner does have to maintain the payment of homeowners insurance and property taxes.)

A HECM provides for drawdowns that the homeowner can use as necessary, as well as a line of credit that can be a resource for large costs like long-term care. And the homeowner and family are not on the hook in case the borrowings exceed the market value of the house.

We knew that a HECM could be a partial answer to liquidity in a retirement if integrated correctly.

HECM as part of a retirement plan

I've written about this before in the article What the HECM? Combine It With a QLAC and See What Happens. To repeat, the key is to partner up a HECM with a QLAC so that each element does its best work.

In this design, which we call HomeEquity2Income, a HECM provides both modest drawdowns in early retirement years and substantial liquid savings late in retirement, and a QLAC provides long-term longevity protection.

We'll go into more detail in one of the future articles in this series.

Rollover IRA and personal savings

A rollover IRA and personal savings may represent 50% of a retiree's average net worth; however, they are often treated as the only parts of a retirement financial plan: Live off the investment returns until the end of life.

In our planning, while we don't address the tactics of individual security selection, our plan does look at these key aspects of portfolio design:

• Maximize after-tax results
• Recommend balance of growth vs income portfolios
• Achieve retirement plan goals without complex or risky strategies

We will talk more about how these strategies have performed historically and how to figure out the most effective way the portfolios work with other asset classes in the upcoming articles of the series.

Curious about how your plan might look? You can take the first steps to putting it together. Input your numbers here and find out how your retirement could benefit by combining all your assets. A Go2Income adviser can answer questions.

Related Content

• An Expert Guide to How All-Assets Planning Offers a Better Retirement
• This HECM-QLAC Power Move Can Unlock Guaranteed Retirement Income
• For a Richer Retirement, Follow These Five Golden Rules
• Transform Your Retirement Plan With This Powerful Combo
• How Combining Your Home Equity and IRA Can Supercharge Your Retirement