What Is The New Retirement?
BUYAPENSION.COM was founded because we recognize that the current generation of retirees and Baby Boomers face a unique set of retirement income concerns. Outliving your assets, not keeping up with inflation and unrealistic investment expectations all combine to create an extremely challenging financial planning problem. At BUYAPENSION.COM, we help our clients address all these complex issues as they struggle with this "New Retirement".
Longevity Risk Longevity Risk 1
Ask someone what their life expectancy is and they'll usually cite some statistic they've read in the newspaper. "A girl born today has an average life expectancy of..." is usually what folks remember. The key here is life expectancy, which is great, if you were born yesterday. If you weren't born yesterday, life expectancy means practically nothing to you. Your concern should be average longevity, which is an entirely different thing. A newborn might have a life expectancy of 82 only if she survives childhood disease, high school, college and the stress of working and raising a family. A retiree has already survived all those years. The question becomes, on average, how much longer can one expect to live if they've made it to age 65. See the chart below.
As you can see, a healthy female that has made it to 65 actually has a 50% chance of still being alive at 88 and a 25% chance of making to 94! And that doesn't even consider the continuing advances in health care that seem to consistently promote longer life spans.
Of all the investment risks associated with "The New Retirement", longevity risk is the most misunderstood and, quite possibly, the most significant.
Excess Withdrawal Risk Excess Withdrawal Risk 2
Asset allocation and diversification are two of the key factors in growing your money for retirement. However, once you begin to utilize your savings for retirement income, the rate at which you withdraw your money from your accounts can dramatically affect how long your money will last. Until recently, many people held overly optimistic opinions that withdrawal rates of 7%, 8% or even more were sustainable because they could count on rising stock prices to keep the value of their investments unchanged or even growing. The most recent stock market correction has exposed that error in judgment.
The chart below illustrates how different withdrawal rates may affect the sustainability of a pool of assets. The chart assumes a typical, balanced portfolio of stocks, bonds and cash. It begins with $500,000 and tracks it over the period from 1972 to 2006 using a range of inflation-adjusted withdrawal rates.
As you can see, a 4% withdrawal rate is the only one of the scenarios that would have sustained the asset pool and produced income throughout the couple's projected lifetime. Additionally, notice that even a slight increase of the withdrawal rate to 5% would have ended the income after only 25 years, when there is still a 35% likelihood that one spouse would still be alive and in need of money.
Inflation Inflation 3
Inflation is the long-term tendency of money to lose purchasing power. It can have a significantly negative effect on retirees because as it steadily erodes the value of your retirement assets, it is also increasing the cost of goods and services you may need in the future. For example, today a gallon of milk, a carton of eggs and a pound of bacon costs about $10. At just a 3% annual inflation rate, the same basket of goods will cost almost $20 by the year 2030. Again, inflation pushes the price of everything higher while it drives the buying power of a dollar down. That's why it's so important for your investments to outpace inflation.
As you can see, even small changes in the annual rate of inflation can have serious impacts on your retirement security.
Health Care Expenses Health Care Expenses 4
Rising medical costs, longer life spans, possible shortfalls for Medicare and declining employer-sponsored medical coverage all contribute to make health care expenses a critical challenge for retirees and pre-retirees alike. In fact, many experts suggest that retirees fund a considerable portion of their own health care expenses not covered by Medicare. This includes items such as co-pays, deductibles, supplemental income insurance and over-the-counter drugs. This may be particularly important if you do not have employer coverage.
Of particular concern for future retirees is the long-term trend of companies to drop health care coverage for their retired employees. By the end of 2006, only 19% of U.S. companies with over 500 employees still offered their retirees health care coverage. As recently as 1993, this number was over 40%. Unfortunately, as this trend continues, total medical spending in America continues to grow faster than general inflation, rising 7.4% in 2007 alone.
Oh, and we haven't even discussed the possibility of long-term care yet, which averages over $70,000 per year in the U.S. It's been estimated that up to half of those aged 65 today will be admitted to a nursing home at some point in their lives. This only reinforces just how important it is to ensure that you can cover these expenses.
You may wonder what this has to do with immediate annuities. Well, if you haven't already looked, long-term care insurance premiums can be very expensive, especially if you're over age 65. One successful funding strategy is to set aside enough money in an income annuity to generate sufficient cash flow to cover the regular premium payments.
Timing The Commencement of Social Security Benefits Timing The Commencement of Social Security Benefits 5
In the past, the typical retiree marched into the local Social Security office on their 62nd or 65th birthday and completed the paperwork to begin their payments.
Given the longevity risk today's retirees face (see section I), much care must now be taken when considering your Social Security commencement date.
Few people realize how much a decision to delay benefits can contribute to income security later in life. It can, for example, help make any later decision to return to work a voluntary choice, not a necessity. Consider delaying the commencement of benefits beyond the minimum threshold of age 62 or 65, instead waiting until you reach the age when full retirement benefits are available. This delay can raise a person's eligible benefits by a significant amount and, going forward, future inflation adjustments to that retiree's Social Security income will be calculated from a higher initial base.
According to the Social Security Administration Benefit Calculator (found at www.ssa.gov), an individual born in 1950 and currently earning $50,000 per year could expect a monthly benefit of $1,070 upon retirement at age 62; $1489 on retiring at age 66; and $2047 if he or she delayed retirement until age 70.
Once again, an immediate fixed annuity offers a possible solution. Dedicating some retirement funds to an immediate annuity can help bridge the "income gap" that one would experience if he or she was to postpone the commencement of Social Security benefits.
The transition from full-time work and asset accumulation to retirement and asset drawdown brings with it a new and complex set of financial risks and decisions.The main challenge - achieving potential lifetime income annuities solutions - is a serious one. However, by planning wisely, most Americans can use investment annuities income and insurance products to craft strategies that will reliably meet their retirement lifestyle needs.
At BUYAPENSION.COM, we believe that every retiree and pre-retiree should have a retirement income plan that realistically estimates their expenses and seeks to ensure that they do not outlive their assets. We believe that essential expenses, including health and long-term care insurance, should be covered first by predictable sources of lifetime income such as Social Security, pensions, annuities and sustainable long-term withdrawals from assets. Beginning the planning process is the essential first step to finding financial security in retirement. Contact us, either through the internet or over the phone, and we'll help you get started.