Retirement Income
It's fair to say that until recently, investors (and their advisors) were singularly focused on saving for retirement. Lately, however, the focus has shifted largely to how to make money last through retirement—a move from accumulation to decumulation.
The obvious reason for this shift is the fact that baby boomers are retiring in droves. But aside from the demographic shift, there are at least three reasons for this new-found interest in retirement income planning:
Not long ago, a typical retiree enjoyed a pension benefit provided by their employer, a guaranteed income stream for as long as the retiree (and the spouse) lived. It was entirely employer-funded, a sort of a reward in exchange for a job well-done and loyalty. Some employers were generous enough to even subsidize all or most of health benefits during retirement.
Fast forward a few decades, and now the retirement plan of choice for most employers is a 401(k) plan. Unlike defined benefit pension mentioned above, it's almost fully employee-funded and does not provides guaranteed lifetime income. In effect, today's retirees are left on their own to manage their retirement savings, hoping they would last through potentially decades of retirement years.
This lack of guaranteed lifetime income is exacerbated by the fact that retirees are expected to live much longer than those in the previous generation. Thus, what might have been an adequate nest-egg a generation ago may not be nearly enough for today's retirees. So for them, the risk of running out of money during retirement is real. Case in point, when Social Security was enacted in 1935, the average life expectancy in the U.S. was right around 65. So the government didn't really have skin in the game. Needless to say, it's a completely different ballgame now.
In addition to longevity, the timing of retirement can also have a devastating impact in the sustainability of retirement income. If a retiree's investment performs poorly in the first year of retirement, the probability of the nest-egg lasting through retirement is significantly impaired. This is because the combination of poor investment performance and a withdrawal has a dramatic compounding effect on the investment balance. If the investment loss continues into the second (and third) year of retirement, the damage can be profound, even permanent.
Insurance products, like annuities and whole life insurance, can help hedge against the risk of running out of money during retirement by providing guaranteed income and low-volatility assets without stock market risk.
The obvious reason for this shift is the fact that baby boomers are retiring in droves. But aside from the demographic shift, there are at least three reasons for this new-found interest in retirement income planning:
- Disappearance of defined benefit pension,
- People living much longer than the previous generation, and
- Timing of retirement.
Not long ago, a typical retiree enjoyed a pension benefit provided by their employer, a guaranteed income stream for as long as the retiree (and the spouse) lived. It was entirely employer-funded, a sort of a reward in exchange for a job well-done and loyalty. Some employers were generous enough to even subsidize all or most of health benefits during retirement.
Fast forward a few decades, and now the retirement plan of choice for most employers is a 401(k) plan. Unlike defined benefit pension mentioned above, it's almost fully employee-funded and does not provides guaranteed lifetime income. In effect, today's retirees are left on their own to manage their retirement savings, hoping they would last through potentially decades of retirement years.
This lack of guaranteed lifetime income is exacerbated by the fact that retirees are expected to live much longer than those in the previous generation. Thus, what might have been an adequate nest-egg a generation ago may not be nearly enough for today's retirees. So for them, the risk of running out of money during retirement is real. Case in point, when Social Security was enacted in 1935, the average life expectancy in the U.S. was right around 65. So the government didn't really have skin in the game. Needless to say, it's a completely different ballgame now.
In addition to longevity, the timing of retirement can also have a devastating impact in the sustainability of retirement income. If a retiree's investment performs poorly in the first year of retirement, the probability of the nest-egg lasting through retirement is significantly impaired. This is because the combination of poor investment performance and a withdrawal has a dramatic compounding effect on the investment balance. If the investment loss continues into the second (and third) year of retirement, the damage can be profound, even permanent.
Insurance products, like annuities and whole life insurance, can help hedge against the risk of running out of money during retirement by providing guaranteed income and low-volatility assets without stock market risk.
Make Your Money Last in Retirement
// Manage the risk of running out of money during retirement // Enhance retirement security with guaranteed lifetime income // Manage risk of substantial investment losses early in retirement // Add a retirement income stream without stock market risk // Coordinate retirement income sources to keep tax bracket down // Craft a spending strategy to optimize retirement income |
