Create a Personal Pension Stream in Working Years

Often, individuals who are about to retire will use a lump sum of money to create an income stream to support themselves during retirement. This money typically comes from a 401K, IRA, brokerage account, or some other investment tool. A major concern for these individuals is that they are never sure if the lump sum will be enough to create the needed income stream. Many factors come into play, such as the amount they save every month and investment performance while they save.

People in their savings years (30s, 40s, and early 50s) also face the problem of not knowing how much they need to save. As a result, most people save money and simply hope that it will be enough. They are not able to accurately predict investment performance over the course of 20 or 30 years which makes it impossible to know how much they will have in retirement. There are ways to accurately predict future income even when retirement is 20 to 25 years away. One method is to use guaranteed insurance contracts (GICS) in determining future income on a guaranteed basis.

As an example, we can use a 40 year old that is looking to take income in 20 years. If they deposit $100,000 into a GICS account and then contribute $3,600 a year until age 59, they will be guaranteed an income stream of $25,564.54 for life starting at age 60. If the initial deposit was a smaller amount, such as $50,000, they would still be able to generate a guaranteed income of $15,708.00 for life at age 60.

Regardless of the initial investment amount and ongoing contributions, this strategy will allow for exact income planning at any future date. Increasing the initial lump sum, the ongoing contributions, or expanding the roll up period beyond 20 years will create a large income stream in the future. Income payouts can be set up to pay for the duration of one or two lives depending on the situation.

The experienced professionals at Crowe & Associates will help you with your retirement planning. We will go above and beyond to ensure that you are on the right track so that you can look forward to retirement with confidence and peace of mind.

IS THE PERCENT INCOME RULE STILL SAFE?

The ability to sustain a steady income during retirement has always been a primary concern for individuals and families in the United States. Recent studies have shown that approximately 61 percent of U.S residents ages 44 through 75 are more afraid of running out of savings/income than they are of death. In order to avoid exhausting a savings nest egg, guidelines have been developed. The most popular is the 4 percent income rule.

The 4 percent income rule was developed in the early 1990s by a certified financial planner named William Bengen. He set 4 percent as the amount of money a retiree can take out of their investments every year with a high probability that it will last for at least 30 years. Since its establishment, financial advisors have been utilizing the 4 percent income rule as the benchmark with their clients.

However, a recent study from the Journal of Financial Planning has suggested that 4 percent is no longer a safe number. The study determined that 1.8 percent is a more appropriate number to ensure income does not run out during retirement. The revised rate was calculated based on a variety of market factors. One marker in this study was the historically high price to earnings ratio in the market, which may lead to low future investor returns. The risk of poor market timing was also a factor. Taking income at the start of a bear market can have a drastic negative effect on account values and the ability to take future income.

Using a 1.8 percent model instead of a 4 percent model may be safer, but it has obvious drawbacks. Consider a person with a $500,000 investment account can only safely pull $9,000 a year from their account, versus the 4 percent model which allowed them to take $20,000 a year. If the 1.8 percent rule is followed, there is an obvious need to increase the investment nest egg prior to retirement, which may not be feasible for many people.

An alternative to this approach would be to use a guaranteed insurance contract (GIC) to create the needed income. The advantage of a guaranteed insurance contract is the ability to draw a much higher percentage of income on a guaranteed basis. The most competitive GICs will currently pay 5.5 percent to 6.0 percent income for life on a single life, and 5 percent on a joint life basis. Most contracts do not require forfeiture of the lump sum invested. Some GIC contracts also offer a guaranteed roll up rate during the accumulation period. It is not uncommon for companies to offer a 7 percent or 8 percent compound accrual rate for up to 30 years. The guaranteed roll up allows for more precise planning of future asset needs.

While using a GIC can offer many advantages, caution must also be taken. There are hundreds of companies currently offering various bells and whistles on GIC contracts in order to gain market share. Some offer benefits or rates that look appealing, but in reality, have little benefit to the consumer. Others will promote incredibly high roll up on accumulation, but will then lower the guaranteed income payout. The most important features should be compared prior to choosing a contract in order to obtain the best guarantees available.

The experienced professionals at Crowe & Associates will help you with your retirement planning. We will go above and beyond to ensure that you are utilizing the right investment tool so that you can look forward to retirement with ultimate peace of mind.