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Planning ahead for retirement can help you to better ensure that you’ll have a way to “replace” your employer’s paycheck. But if you’re using outdated income strategies, it could have an impact on your future financial security – and possibly even cause you to run out of money while you still need it.
Depleting assets in retirement is one of the biggest fears on the minds of retirees today, as well as those who are inching closer to that time in their lives. This fear is based in large part on a variety of financial-related risks, such as:
On top of that, people (on average) are living longer now. But longevity can actually be considered a “multiplier” of all other financial risks, because you need to face them for a longer period of time. In order to combat this risk, it can take some advanced planning.
In the past, retirees could oftentimes rely on income that was generated from three primary sources:
Many companies provided income security to their retired employees by way of a defined benefit pension plan. Typically, income from these plans would continue throughout the lifetime of the worker/retiree, and in many cases, it could even keep paying for the life of their surviving spouse.
But these plans are extremely expensive for companies to keep up with – especially given that their former employees are living longer, and in turn, that the income payments must continue for a longer period of time. Because of that, defined benefit pensions are quickly disappearing.
Social Security was another retirement income staple for people in the past. But even though you may still be able to count on this retirement income generator now, if you’re considered an average wage earner, Social Security may only replace about 40% of your pre-retirement income.
In addition, past retirees could plan on receiving the full amount of their benefit at age 65. But now, based on your birth year, you may have to wait as long as age 67 before you are eligible for your full Social Security benefit.
| Year of birth | Minimum retirement age for full benefits |
|---|---|
| Year of birth1937 or before | Minimum retirement age for full benefits65 |
| Year of birth1938 | Minimum retirement age for full benefits65 + 2 months |
| Year of birth1939 | Minimum retirement age for full benefits65 + 4 months |
| Year of birth1940 | Minimum retirement age for full benefits65 + 6 months |
| Year of birth1941 | Minimum retirement age for full benefits65 + 8 months |
| Year of birth1942 | Minimum retirement age for full benefits65 + 10 months |
| Year of birth1943 to 1954 | Minimum retirement age for full benefits66 |
| Year of birth1955 | Minimum retirement age for full benefits66 + 2 months |
| Year of birth1956 | Minimum retirement age for full benefits66 + 4 months |
| Year of birth1957 | Minimum retirement age for full benefits66 + 6 months |
| Year of birth1958 | Minimum retirement age for full benefits66 + 8 months |
| Year of birth1959 | Minimum retirement age for full benefits66 + 10 months |
| Year of birth1960 or later | Minimum retirement age for full benefits67 |
If past retirees needed to rely on income from personal savings and/or investments, financial professionals would often turn to a portfolio drawdown strategy that is referred to as the “4% Rule.” Using this retirement income method, a retiree could often withdraw 4% of the money in the portfolio each year, while allowing the remainder of the funds to keep growing.
By going this route, a portfolio that consisted of 50% stocks and 50% bonds could typically remain in-tact for approximately 30 years. But given the changing financial markets, 4% is no longer considered a safe rate of withdrawal.
In fact, a number of economists and financial analysts now feel that a withdrawal rate of even 2.4% isn’t guaranteed, and could end up depleting funds while they are still needed by the investor/retiree.
In addition to market volatility and a low interest rate environment, the order – or sequence – in which investors receive returns can also cause a portfolio to run out of money sooner than anticipated.
As an example, if two investors each start out with $100,000 in their portfolios, and each withdraws 9% per year for the next three years, how is it that one of the investors runs out of money six years sooner than the other – especially if they both attain the exact same average return?
| Investor | Year 1 | Year 2 | Year 3 | Average Return | Years Until Depleted |
|---|---|---|---|---|---|
| InvestorInvestor 1 | Year 1+7% | Year 2-13% | Year 3+27% | Average Return+7% | Years Until Depleted18 |
| InvestorInvestor 2 | Year 1+7% | Year 2+27% | Year 3-13% | Average Return+7% | Years Until Depleted24 |
The reason is that Investor No. 1 received the negative 13% return one year earlier than Investor No. 2 did – even with all other factors being equal. With that in mind, investors and retirees need to be mindful of not just returns, but the order in which those returns are received.
Planning for retirement today (and tomorrow) is a different ball game now than it was just a few decades ago. In fact, noted economist Wade Pfau recently discussed the impact of current economic conditions on retirement income planning, and how market volatility and uncertainty can literally destroy a retirement portfolio.
According to Pfau: “Interest rates are so low today that it’s tough to get up to the 4% withdrawal rate without risking running out of money.” Added to that is the fact that a portfolio may never be able to recover from withdrawing money early in retirement – especially during a down market.
In order to keep future income in line with expenses, retirees have been forced to implement various strategies – some more enjoyable than others – such as:
While some of these strategies, like going back to work, require “trading time for money,” there are others – like annuities – that can guarantee an income stream for life, regardless of how long you may need it.
Even with all of the uncertainty in today’s financial markets, there are ways that you can ensure that you have a stream of incoming cash flow. Without having to worry about running out of income in the future, you can live a worry-free retirement where you are able to focus on the things that truly matter, like relaxing and spending time with those you love.
So, if you’re ready to learn more about how a customized retirement income plan could provide you with the income you need, regardless of market conditions, contact an Alliance America financial professional today.
Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.
