The Entry Level Millionaire

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.