At some point, most people will have to face the reality of retirement. Unfortunately, the days of receiving a gold watch and a solid pension are long gone. Higher life expectancies combined with shaky markets and an uncertain Social Security system make it entirely possible for a healthy retiree to outlive their money. The last thing you need is to spend your sunset years broke and miserable. Here are some tools you can use to help manage your hard-earned money and make it last.
Longevity insurance ensures that you’ll have more money available in your later years, rather than less. The idea is to make an initial contribution at around age 65. The insurance company invests this money for 15 to 20 years, after which you begin taking payments from it. For example, a retiree with a $500,000 portfolio can use $30,000 of that money to purchase a premium when he turns 65. All he has to do is make sure the rest of his portfolio will cover him for 20 more years. After that, his payments will kick in and cover him for the rest of his life.
Another option is to take on a part-time job or side business that can be used to continue accumulating money in your retirement accounts. The best way to approach this is to not officially retire until you have something lined up. Find something you can actually enjoy doing that doesn’t take up a lot of your time and put the money you earn from that into a Roth IRA. If you can keep this up for 10 years into your retirement, you should have enough to purchase an immediate annuity that you can take payments from for the rest of your life.
Long-Term Care Insurance
One of the hardest things to determine is how much medical care you’ll need as you get older. Even if you’re relatively healthy now, that can change as age sets in. Furthermore, the costs of assisted living or nursing care are bound to rise even higher than they are now. Long-term care insurance pays a daily benefit to cover assistance for those who have trouble with everyday activities such as bathing, eating, getting out of bed and walking. Another option is long-term care rider that may be available with a whole life or single premium annuity policy. How the money is used is typically up to the policy holder, as long as they meet the basic qualifications for life insurance for seniors over 70.
Lower Withdrawal Rate
Traditionally, financial advisers have advised their clients to withdraw 4 percent from their assets the first year of retirement and increase it each year by the amount of inflation. This is to ensure that their money lasts for at least 30 years. Of course, this benchmark was based on a portfolio made up of 50 percent stocks and 50 percent bonds. That may be nothing like your portfolio and how long your money lasts may depend on whether your first 4 percent is withdrawn during a bull or bear market. A safer bet is to withdraw less when market conditions are less favorable (such as 3 percent, or even 2.5 percent, while still adjusting for inflation), then go back to 4 percent when they improve.
Another creative way to protect yourself from inevitable downturns is to place your money in “buckets.” To get started, first determine how much of your essential expenses can be covered by Social Security, pensions and other guaranteed income. Put the difference into safe investments, like CDs and money market funds. Create another bucket for non-essential expenses, such as traveling. That money should go into a mix of short and intermediate-term bonds. Although it is possible to do this with just two buckets, it doesn’t hurt to have a third one with both stocks and bonds. Any profits earned off this bucket can be used to replenish the first two.
Annuities come in different varieties, but the idea is to invest a lump sum up front and withdraw regular payments from it. It’s easy to underestimate how long you’ll live past retirement and an immediate annuity turns part of your savings into an income stream that can provide you with more peace of mind. Variable annuities are somewhat more complicated and may not be the best choice for retirees. A fixed index annuity is easier to manage, especially if you can find one with fees at or below one percent.
Spend and Grow
Finally, you might want to consider a strategy known as the “two-headed beast.” It involves splitting your portfolio in two parts, one for spending and the other for growing. The portion dedicated to spending will become depleted over a period of time, while the rest continues to grow for the purpose of replacing it. As an example, consider a $1,000,000 portfolio split in two parts. $400,000 would go into the retiree’s checking account to be spent over a period of 10 years. The idea is to grow the remaining $600,000 back to $1,000,000 over the same period, replacing what was spent.
Since it’s impossible to know how long you’re going to live, planning for retirement can be very tricky. You don’t want to run out of money, but at the same time, you want to enjoy the time you have left without constraining yourself unnecessarily. Fortunately, the tools and strategies outlined above can help you formulate a plan that meets your individual needs.
Lenny Robbins has been active in financial services for over 30 years and was the life insurance coordinator at Reynolds Securities, Inc. in their Beverly HIlls office. As a V.P. at Oppenheimer & Co. his securities clients also benefited from his life insurance knowledge. In addition, he was a Securities Principal and owner of a broker/dealer licensed by FINRA. Since 1991 he has concentrated on all phases of life insurance, annuities as well as life insurance settlements. His goal has been to provide clients with value, education and service.
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