You did everything right. Saved, lived within your means, and remained steadfast in your long term investing discipline. And by retirement, you've managed to amass a seven figure portfolio, which will be fuel for your retirement income over perhaps the next 30 years.
So what kind of income can you reliably and sustainably squeeze from that million dollar pile that took you maybe 40 years to put together? According to most of the current research among practitioners and academics, the maximum sustainable, inflation adjusted withdrawal percentage starts at about 4% of initial principal. This percentage is often referred to as the maximum sustainable withdrawal, meaning it has about a 90% chance of producing inflation adjusted income of $40,000 a year for 30 years.
So here's the irony - you're officially a millionaire, but you're retirement income is no bigger than that earned by a typical entry level college graduate. Take out more than that $40,000, and you risk taking out too much at the wrong time and jeopardizing the future of your retirement income producing nest egg.
What are the alternatives? You could try to find some high dividend paying stocks, but they would increase your risk of being in a single stock, and the dividends aren't guaranteed.
You could invest in bonds, but you'd again increase your risk by having significant capital in just a few high yielding issues. Or you could try one of the newfangled payout funds designed to preserve principal while paying out income, but they can't guarantee principal won't be eroded and thus your nest egg could again be in jeopardy.
What to do? Here's a crazy thought - why not consider a good old fashioned income annuity? For a 65 year old couple, you can guarantee income that lasts as long as either spouse is alive, and get a cash flow of about 7%. Note that 7% is not merely 3% greater than 4% as in our withdrawal scenario - it's 75% greater. That's a serious cash flow improvement. That $1million nest egg would produce $70,000 a year for as long as either spouse is alive.
Of course, no one would or should put all their retirement money in an income annuity, but to th extent you can stretch finite resources to get better cash flow, the annuity can be a valuable addition to an income portfolio.
Thursday, September 25, 2008
Sunday, September 21, 2008
Liquidicide: The Ugly Side of Liquidity in Retirement
What a crazy week - words like apocaplyptic, biblical, and cataclysmic come to mind. By all accounts the financial world was crashing down in such a manner as to make October 19, 1987 look like a junior varsity scrimmage game.
In times like these, the ability to make decisions with regard to one's retirement assets can ironically be, um, a bad thing. How many of you in the last week or two threw in the towel and moved equities into cash? How many of you could have possible guessed that after a string of ulcer-inducing days, the market would rally an historic 8.5% on Thursday and Friday, in the wake of historic moves by the Fed and Treasury? The weeks losses were nearly completey erased! Talk about to hell and back. HOLY COW WAS THAT EVER NUTS!
So here's the rub. If you did decide to go to cash at or near the bottom - you were not alone. Historic volumes of flows jetted into short term treasury notes paying historically low yields. But the massive boomerang effect of the 8.5% rebound happened with lightning speed - those who pulled out Wednesday missed out on an average years worth of gains in 48 hours.
And hence the term "liquidicide". Not yet recognized by Webster's, but intended to define what it sounds like: financial destruction due to unfettered access to and control over the disposition of retirement assets. Hey, let's start with me. Yours truly bought an internet mutual fund on March 11, 2000, when the NASDAQ was at it's all time high of 5000 and change. Why? Because I could! I turned $40,000 into $8,000 in about 4 months. And eight years later, it's back up to a whopping $12,000! That's liquidicide! Fortunately, I'm 20 years from retirement, God willing. But what about those who are retired right now? I contend that there's a high risk of liquidicide when all assets used to produce retirement income are left liquid and in complete control of retirees.
So what can be gleened from this? Be Wise - Annuitize.
Consider the alternative that continues to be a rare choice precisely because it removes the ability of the retiree to have access to the income producing asset. It's a bilateral lifetime contract where the company and the client are committed for life. And that is offputting to some folks - many folks - at first blush.
But think about the emotional and practical advantages of knowing you have a baseline of guaranteed lifetime income - in good times and very, very bad times like we just experienced. The emotional, fear based desire to call in all assets and hibernate until the storm subsides is reduced, because the stakes are lower. Your bases are covered with the annuity and Social Security, maybe a pension. The rest, while still precious, can be left to recover when the smoke finally clears. The annuity is for surviving - cover that first. The rest is for thriving.
Next Post: The Entry Level Millionaire
In times like these, the ability to make decisions with regard to one's retirement assets can ironically be, um, a bad thing. How many of you in the last week or two threw in the towel and moved equities into cash? How many of you could have possible guessed that after a string of ulcer-inducing days, the market would rally an historic 8.5% on Thursday and Friday, in the wake of historic moves by the Fed and Treasury? The weeks losses were nearly completey erased! Talk about to hell and back. HOLY COW WAS THAT EVER NUTS!
So here's the rub. If you did decide to go to cash at or near the bottom - you were not alone. Historic volumes of flows jetted into short term treasury notes paying historically low yields. But the massive boomerang effect of the 8.5% rebound happened with lightning speed - those who pulled out Wednesday missed out on an average years worth of gains in 48 hours.
And hence the term "liquidicide". Not yet recognized by Webster's, but intended to define what it sounds like: financial destruction due to unfettered access to and control over the disposition of retirement assets. Hey, let's start with me. Yours truly bought an internet mutual fund on March 11, 2000, when the NASDAQ was at it's all time high of 5000 and change. Why? Because I could! I turned $40,000 into $8,000 in about 4 months. And eight years later, it's back up to a whopping $12,000! That's liquidicide! Fortunately, I'm 20 years from retirement, God willing. But what about those who are retired right now? I contend that there's a high risk of liquidicide when all assets used to produce retirement income are left liquid and in complete control of retirees.
So what can be gleened from this? Be Wise - Annuitize.
Consider the alternative that continues to be a rare choice precisely because it removes the ability of the retiree to have access to the income producing asset. It's a bilateral lifetime contract where the company and the client are committed for life. And that is offputting to some folks - many folks - at first blush.
But think about the emotional and practical advantages of knowing you have a baseline of guaranteed lifetime income - in good times and very, very bad times like we just experienced. The emotional, fear based desire to call in all assets and hibernate until the storm subsides is reduced, because the stakes are lower. Your bases are covered with the annuity and Social Security, maybe a pension. The rest, while still precious, can be left to recover when the smoke finally clears. The annuity is for surviving - cover that first. The rest is for thriving.
Next Post: The Entry Level Millionaire
Saturday, September 20, 2008
Welcome to Be Wise Annuitize
Welcome to my blog where I invite discussions and debate about the topic of annuitization and other methodologies available today to the retail investor seeking to generate retirement income from discretionary retirement accumulations.
I have spent over 21 years in the insurance industry, with over 20 of those years in the annuity business, the last 17 in a marketing capacity. I have read countless articles on the topic of retirement income, and engaged in numerous discussions and debates on which method is best in particular situations. I look forward to further exploring these issues with whomever would like to join in, and hope to share new perspectives on these issues.
My next post will be titled "Liquidicide: The Ugly Truth About Liquidity" to underscore one important reason why annuitization is so critical to retirement success and well being for the majority of us without rich pensions.
I have spent over 21 years in the insurance industry, with over 20 of those years in the annuity business, the last 17 in a marketing capacity. I have read countless articles on the topic of retirement income, and engaged in numerous discussions and debates on which method is best in particular situations. I look forward to further exploring these issues with whomever would like to join in, and hope to share new perspectives on these issues.
My next post will be titled "Liquidicide: The Ugly Truth About Liquidity" to underscore one important reason why annuitization is so critical to retirement success and well being for the majority of us without rich pensions.
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