As our 50-something clients approach retirement, their ongoing needs can easily be broken down into 3 areas: Accumulation, Income, and Legacy. In this article, we will deal with guaranteed income for life, i.e. checks that keep coming at 92 even if the money ran out at your age 85.
John is 68 and Mary is 62. Mary spent 5 years caring for her aging mother, who died at 97, after her funds ran out at age 85. Rather than retiring on time, John continued to work in order to help fund his mother-in-law’s care during her last 12 years. John, who co-manages their investments with their stock broker, doesn’t want Mary to worry about investment strategy and risk exposure after his passing; he wants to ensure she has the financial peace of mind to live independently for the rest of her life. He also wants to ensure she has the funds to pay for assisted/long term care if needed. While John is in great health, it is feasible Mary will outlive him given her mother’s longevity and their 6-year age difference. They have two adult children with busy careers, and they don’t want to become a burden and impact their children’s ability to save aggressively for their own retirement.
After reading an article in the Wall Street Journal which said that the advisor that got you to retirement is very often not the one to get you through retirement, John and Mary decided to meet with another advisor, Robert, who specializes in guaranteed lifetime income, something their stock broker had only done for other clients on two prior occasions. While encouraging them to maintain modest risk exposure on some of their assets for the long term, Robert introduced them to several innovative strategies that would provide John and Mary with a consistent and generous income, even if one or both of them lived past 100 years of age. Robert explained that it was the insurance company backing these guarantees that would continue to send John and Mary a check long after their account value was depleted. “If your previously at-risk dollars would have run out at your ages 88 and 82—it is the insurance company’s dollars that will keep you solvent from that point forward, guaranteeing that same income until the passing of the second spouse.” Had John and Mary not chosen this option, their accounts could have also been impacted by a major decline in the stock market, where Robert explained the average bear market decline of the last 100 years has been -34%. “Losing a third to half of the money it has taken us 40 years to save was simply not an option; I want Mary to have financial security long after my passing,” explained John.
As John is only 68 and can increase the size of his Social Security check by at least 16% by waiting, John and Mary have decided to wait until John’s age 70 to take the largest possible Social Security payout available to him. This was not about the likelihood that John would live long enough to make up the difference between what he would have gotten at full retirement age (66) and 70, it was much more about the fact that Mary would be entitled to his benefit, dropping hers at his passing, for the rest of her life, cost of living adjustments included. Because John and Mary are not likely to need to turn on their guaranteed lifetime income until several years after John’s Social Security benefits begin, Robert introduced them to a creative formula for increasing their income base prior to turning on that guaranteed lifetime income. As Robert explained it, the insurance company would give their GLWB (Guaranteed Lifetime Withdrawal Benefit) a 5% bonus at inception, after which they would earn a small fixed guaranteed percentage each year (ex: 2%), in addition to getting 150% of whatever their market index earned each contract year. (Example: If the market was only up 4%, they would earn an 8% interest credit on 105% of the money.)
In summary, John and Mary have guaranteed themselves an ample income, know they will never become a financial burden to their children regardless of how long each of them lives, and that a decline in the stock market will have no bearing on that income.
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