If you are 56 today, you will likely live to age 86, according to the Social Security Administration life expectancy calculator. That is an average, so half my readers will live longer than age 86.
How can you be sure that you have enough saved at retirement to last as long as you do?
It’s a great question that my working age folks are asking, according to a Franklin Templeton Survey. The survey shows:
- 52 percent of workers are concerned about having retirement income to meet their needs.
- More than one-third of the folks within five years of retirement do not have a strategy to recreate a paycheck.
- 72 percent of people within 15 years of retirement are stressed about their savings and investments.
Why should I have a retirement plan?
The Templeton Survey shows that people with a plan are less like to be stressed than those without.
And the people with a plan have an income strategy: 84 percent of respondents with a written financial plan have an income plan designed to last for 30 years or more.
What is an annuity?
One tool to consider for retirement income is one of the oldest retirement tools – an annuity. The original idea dates back to the Roman Empire and was part of the retirement benefit of a Roman soldier.
In its purest form, an annuity is a contract between the insured (the retiree) and an insurer (the insurance company). The retiree deposits a lump sum of money with the insurance company and in exchange the insurance company promises to pay a fix amount every month until the retiree dies or a fix number of payments is reached, whichever comes last. This is a pretty simple example, and it has good and bad aspects:
Good
- The retiree knows how much income is available every month.
- The retiree has no risk that changes in market conditions will change the amount of income available.
- The income is sent every month the retiree is alive – no matter how long you live.
Bad
- The retiree does not have a chunk of money to use for an unexpected or a special expense. They only have the monthly check.
- The retiree has no chance that income will grow with inflation over time. In its simplest form, the payments never rise.
- Annuity contracts are rarely as simple as this. They often have a lot of added features that can increase expense and confuse the buyer.
Is an annuity plan right for me?
The effectiveness of an annuity depends on the insurance company being efficient at estimating how many payments they will need to make on average for every contract. Since insurance companies have been doing this for a long time, they have invested in lots of research to help improve the way the companies estimate a retiree’s life expectancy.
The risk for the retiree looks like this:
- You lose on the annuity if it only pays while you are alive and then you die too soon.
- You win with an annuity if you live longer than the insurance company expected. If you live 20 years longer than the insurance company thought you would, you will very likely to get much more money out than you put in.
Many investors opt for a more flexible approach to creating lifetime income. If those retirees work with a CERTIFIED FINANCIAL PLANNER™ professional they will get broad based retirement planning that includes reliable income along with flexibility and low investment costs.
And if the CFP® professional is always an advocate for the client– a fiduciary advisor – and only works for the client – a fee-only advisor – the retiree can be confident that the advice they get is focused on their best interests and is a good fit for their complete situation.
A CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will get a meaningful understanding of your goal progress. And you will get a personalized action plan for how to move forward.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And, yes, I’m still taking on a few great families to be part of my financial planning practice.
If you would like to know how to create lifetime income you cannot outlive, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.