I hate the phrase “for the rest of your life”. It sounds so, un-forever. But that’s a fact. This venture on earth will eventually come to an end.
So while we’re here we need money to sustain our daily lives. The amount required depends on our lifestyle and availability of funds, now and in the future.
A common concern for retirement years is the possibility of running out of money. The concern may be not to have saved enough to start with, losses in market downturns or spending more of what we do have than can be maintained at a sustainable rate.
If you have a pool of money to draw from what are some options to consider in order to stretch out your income? If you’re in equity markets (stocks/bonds) what amount (annual percentage) could you possibly withdraw and expect to keep from running out of funds?
One financial firm published a model using samples of how long money would last over a 30 year period based on simulated asset allocation success rates. Assuming an 80/20- stock/bond mix and a 6% withdrawal rate a year produced a 45% chance that a sum of money might last 30 years. A withdrawal rate of 4% increased the chances to 84%. *
If you’re in your mid 60’s and looking at a possible age 90 life expectancy (and considering inflation, health care costs and other unexpected expenses), would an annual withdrawal rate of 4% work for you (a rate that is recommended by many advisors)?
One option is to have money invested in a product (or products) that would be designated to use for paying known fixed expenses such as a mortgage (rent), utilities, food, insurance, etc). Some advisors may suggest purchasing certain types of bonds with different maturity dates, a method called laddering.
Another low risk plan is using a single premium (income) annuity which offers various income options including life time income for one or two lives.** Considering your total financial situation and if annuity is suitable, the annuity income could be used for your fixed expenses leaving other funds available for equity products that may be recommended by your advisor.
You can also use the ‘laddering” concept by purchasing income annuities at different times over a few years. The older you are, the better the income rates. A special federal income tax method also applies to (non-qualified) annuities. If you (and a spouse for joint annuity income options) are unhealthy, income rates may even be better.
So if out living your money is a concern, consider using an income annuity with a portion of your funds. You might even rest easier.
* T.Rowe Price Associates. Simulation results also assumed an annual inflation rate.
** Guaranteed income based on insurance company’s credit worthiness. Annuities
are not FDIC insured. Other types of annuities may offer income rider options.
