Income Planning There will be a time when the distribution or the “decumulation” of your assets will become a priority. Someday, the paychecks will stop, or they may not be what they once were, while you were in your higher earning years. We all need a plan to take, or receive income from our savings and/or investments, so we may enjoy and live comfortably in retirement. While you are on this website, you have the opportunity to read what is sure to be the most enlightening information regarding your retirement that you have ever come across, stemming from a study released by the University of Pennsylvania’s Wharton Business School titled “Investing your Lump Sum at Retirement”. We hope that reading “Investing your Lump Sum at Retirement”, in it’s entirety, will further your ability to determine both your willingness to accept risk, as well as which investment or savings options may be best for you. All of us are faced with the following decision: should we invest our lump sum in the stock market, should we be placing our lump sum in a safe, guaranteed annuity, or should it be some combination of both ideas? In order to make the right decisions for you and your family, you must base your decision upon your ability to live with risk. Consider what percentage of your nest egg should be allocated to market sensitive investments, and what portion of your nest egg should be allocated to fixed, guaranteed savings products. Understanding risk, and various savings and investment issues is not always simple. Information, and misinformation, are found in the daily content streaming from newspapers, the internet magazines, and daily talk shows. By educating yourself on this website you are clearly separating yourself from the masses who may, unfortunately, find themselves less prepared for retirement. If you would like to read a study conducted by the Wharton Financial Institutions , The Wharton School, University of Pennsylvania, “Investing your Lump Sum at Retirement”, by David F. Babbel, Fellow, Wharton Financial Institutions Center, Professor of Insurance and Finance, The Wharton School, University of Pennsylvania, and Craig B. Merrill, Fellow, Wharton Financial Institutions Center Professor of Finance and Insurance, The Marriott School of Management, Brigham Young University, click here now, or continue reading to learn more about the process of income planning. Income planning will often lead to a discussion involving the use of annuities, as income annuities are a financial tool that can be used to turn your savings and investments into a dependable monthly check. It is important for you to understand that some with a strict stock market orientation may contend that stocks and bonds are still the best way to prepare for income needs in retirement. They are correct in the sense that a mix of stocks and bonds in a client’s portfolio, depending on one’s tolerance for risk, may in fact be a fine method for the accumulation phase of one’s nest egg. However, the research performed by the Wharton Business School professors, titled “Investing your Lump Sum at Retirement” is about the “decumulation” phase of one’s nest egg, and it provides evidence that those who maintain that a mix of stocks and bonds to be a competent strategy for the purpose of providing income in retirement, are simply incorrect. According to research, many have failed to properly account for three issues: 1) advisors have over-estimated the return of market sensitive investments, 2) the costs associated with market sensitive investments is higher than originally estimated, and 3) they have underestimated “how long we all will live”. According to the research from the University of Pennsylvania’s Wharton Business School, “You should begin by annuitizing enough of your assets so that you can provide for 100% of your minimum acceptable level of retirement income. Annuitization provides the only viable way to achieve this security without spending a lot more money. The economic models invariably attest to this fact – that the cost of not being able to cover basic expenses far exceeds the potential upside of taking on additional equity exposure. In calculating how much to annuitize privately, subtract from what is needed each month the amount you will be getting from Social Security and any pension benefits you may have accrued.” • So, how do we secure a lifetime of safe, guaranteed monthly income? • The answer lies in the use of fixed, guaranteed annuities (not to be confused with market sensitive variable annuities). Consider that you could target certain monthly expenses – Mortgage, auto-lease etc… • You could choose to insure your lifestyle; – The ability to take vacations. – The ability to visit family and friends. – To play golf! – To do what you want in retirement! Do you have an income gap? In order to create a successful Plan for Living, you must first assess a client’s current retirement income plan. The Retirement Income Worksheet can help you provide a clear, easy-to-understand picture of a client’s retirement plan – and the potential implications of their choices. Step 1: Essential Expenses Many financial experts recommend planning on 70% to 80% of a client’s pre-retirement income to pay for living expenses in retirement. Of that amount, 60% typically covers “essential” or fixed expenses. Use this section to estimate clients expected retirement expenses. | Expense | Current Monthly Cost | x | Inflation Factor | = | Monthly Cost in First Year of Retirement | | Housing | $1,500 | x | 1.28 | = | $1,920 | | Food & Clothing | $500 | x | 1.28 | = | $640 | | Transportation | $250 | x | 1.28 | = | $320 | | Insurance & Medical | $500 | x | 1.28 | = | $640 | | Other | $100 | x | 1.28 | = | $128 | | | | | TOTAL Monthly Essential Spending | à | $3,648 | Step 2: Guaranteed Income Sources Your clients have probably spent some time planning for retirement and may have accumulated assets, a pension and social security payments to draw on. Use this section to determine just how much guaranteed income they can count on in retirement.
| Retirement Income Monthly Income Expected From: | | | Social Security | $2,000 | | Pensions | $950 | | Income Sources Other than Assets | N/A | | TOTAL Monthly Retirement Income à | $2,950 | Step 3: Do they have a gap? It’s important to help clients develop a plan to ensure that their essential living expenses will be covered in retirement. If not, they may have to make unexpected adjustments to their lifestyle or risk running out of money. Use this section to illustrate whether their current plan is designed to meet their retirement expectations. | Total Essential Retirement Spending x 12 | $43,776 | | Less Total Retirement Income Expected x 12 | $35,400 | | Estimated Retirement Income GAP | $8,376 | Annuities can provide the monthly income you need to live a more joyous retirement. Income Plans, commonly referred to as “Laddering”, are engineered to provide retirement income. A) More money early in retirement.
B) More money later in retirement.
C) Constant: the same money throughout the plan years.
or
D) Customized any way you like. Consider what we will call Laddering Concept #1; create a level income stream while rebuilding principal. 1. Place $43,296 into the 1st bucket, an income annuity providing $777a month, in years 1-5. 2. Place $33,927 into the 2nd bucket, a guaranteed annuity, and it will grow tax-deferred for 5 years at 5%, providing $777 of monthly income for yrs6-10. 3. Place $26,579 into a 3rd bucket, a guaranteed annuity, and it will grow tax-deferred for 10 years at 5%, providing $777 of monthly income for yrs11-15. 4. Place $20,826 into 4th bucket, a guaranteed annuity, and it will grow tax-deferred for 15 years at 5%, providing $777 monthly of monthly income for yrs16-20. 5. Finally, place $75,372, into the last Bucket, a guaranteed annuity, and allow it to grow tax-deferred 20 years at 5%, (this may require a series of two ten year annuities) growing back to your original principal of $200,000. Consider what we will call Laddering Concept #2; $200,000 Providing Increasing Income For Life. 1. Place $40,778 into bucket #1, an income annuity, providing $732 a month, in years 1-5. 2. Place $55,000 into bucket #2, a guaranteed annuity which will grow tax-deferred for 5 years , providing $1,260 a month for years 6-10. 3. Place $60,000 into bucket #3, a guaranteed annuity which will grow tax-deferred for 10 years, providing $1,734 a month for years 11-15. 4. Finally, place $44,200, into Bucket #4, a guaranteed annuity and allow it to grow tax-deferred 15 years, providing $2,041 a month for years 16-20. Another way to view income planning is to consider it “A Guaranteed Paycheck for Life”. Consider Diane,asingle woman who is a sole provider, and 75 years of age. Diane’s available assets include several fixed-interest bearing investments, and her tax bracket is 25%.Diane has been retired for 10 years, and is a widow. Diane tells her agent that she is living only on the earnings from her fixed-interest bearing investments.She states that she has had limited success, and fears that inflation and rising healthcare costs will negatively impact her retirement income. Diane still wishes to avoid the stock market due to market volatility and the potential for loss. In order to maximize her after-tax income and provide a more comfortable lifestyle, Diane could move $150,000 from one of her fixed-interest investments into an income annuity. In the event of her death, payments will continue to her beneficiary until the original premium is returned, without involving the costs and delays associated with probate.   The new plan provides Diane with monthly payments of approximately $1,024 guaranteed for her lifetime. This is an increase of $544 per month. In addition, if Diane passes away before the contract value of $150,000 has been paid, her beneficiaries will continue to receive the monthly payment until the contract value has been paid out. You should be aware that there is a menu of savings and investment options beyond stocks, bonds, mutual funds, or CDs. The point of this section on income planning is to re-orient seniors, boomers, or anyone saving for retirement, on retirement planning matters, in both the accumulation phase as well as the distribution phase. ANNUITIES are the ONLY investment that guarantee an income for life, and therefore are useful income planning vehicles. No other investment provides the tax advantages and the absolute guarantees that FIXED ANNUITIES do. |
