The Case for Security in Retirement

My dog nudges me with his nose on my leg when he wants to go for a walk.
Why do some people have to be nudged towards receiving greater retirement security?

There are several sensible and forward-thinking reasons to include insurance in a retirement portfolio. A very wealthy person can utilize an annuity to accomplish tax avoidance. Middle- or upper-middle-income households, that have not saved enough to feel secure in retirement, can avoid longevity risk with a guaranteed income tax-deferred annuity.

High-income households, wanting to shield largish funds from the taxman, can contribute to annuities without limit – something they can’t do with retirement accounts – a big plus and substantial advantage for annuities. Investing in an annuity is part of a well-thought-out retirement portfolio decision. A household holding a sizable portfolio of equities for their retirement allows them to capture appreciating values and holding bonds would guard against market crashes that have happened in the recent past (2000–03, 2008–09 and 2020–?)

A portfolio that splits the holdings between an equity fund and a bond fund, such as a 60/40 split, is the standard way to cover both bases. However, for people who are looking for security and stability in a retirement portfolio, holding an annuity is the smarter choice: it provides a guaranteed monthly “paycheck,” and will not lose value if interest rates go higher. That’s something that bonds can’t deliver. In addition, in order to receive higher bond interest rates than the current low rates would require accepting credit risk and a low rating.

Let’s look at an example of a couple who, having built their retirement fund to $1 million during their working years, transfer  $400,000 to an annuity  at age 65. Depending on the exact annuity selected and the age of the youngest spouse at issue, this amount would yield from $24,500 to $32,600 for life in annual income at age 70. This income lasts as long as either member of the couple remains alive. If these retirees have $40,000 or $50,000 a year in Social Security benefits, they now have a  lifetime income of $64,500 to $82,600 a year . In addition to collecting guaranteed income for life, this retired couple still has $600,000 that they can keep entirely in equities if they so choose. They are insured against the volatility of a bear market and are able to provide for all their basic necessities. Effectively, they continue to have the 60/40 split – stocks to bonds – they would have had before, but the 40 percent in bonds is now in an annuity instead of being held in a bond fund. They can capture the return on equities with the remaining amount of their financial assets, pay for vacations, unexpected expenses and either leave a bequest to their children or cover several years in a nursing home. That is why an annuity purchase is so logical and a justifiable strategy.

Bill Moeller is president and founder of Clarity Financial Insurance. Over the last 40 years, Bill has counseled and worked with hundreds of people planning for and growing their retirement. His practice of helping more people grew out of those consultations and the realization that people need help navigating their course to and through retirement.

P.S. Anyone can recommend accumulation of a stock and bond portfolio. But it’s entirely different to build a comprehensive, safe and secure plan that creates and distributes a steady stream of guaranteed income for years to come!

CLARITY FINANCIAL INSURANCE

info@gainfinancialconfidence.com

949-235-4299