The 3 Common Strategies to Generate Income for Retirees
- Invest your principal in a fixed interest rate vehicle and attempt to live off the interest only.
- Purchasing an annuity with an Income Rider that offers a lifetime income for retirees.
- Making systematic withdrawals from a non-guaranteed portfolio that also contains the possible risk of loss.
We will examine the three most common methods used for generating Retirement income, the Disadvantages of each, and Show you what you can do to help Improve your chances of retirement success.
Option #1 – Taking Income from Interest Only
Among the financial products retirees used are the CDs and the Fixed Index Annuities. This may work if you have 10 million in assets but for the regular retiree that has between 500k and 4 million for retirement, it would be pretty difficult to generate income for retirees or to live up to a fixed interest rate like bonds or CDs.
What are the issues with this strategy?
There’s been a dramatic decline in interest rates on bonds and CDs. The fed is printing trillions of dollars to contain the current pandemic situation and this has contributed a lot to the decline of the interest rates and the devaluation of the dollar.
It’s very difficult to generate enough income for retirees from an Interest only strategy. For Example, if you have 2 million dollars saved for retirement that’ll only generate 1-2% with current interest rates. That’s only $10,000 to $20,000 per year! So, you’ll be spending your principal which can lead you to run out of money.
Another big issue that many retirees face when receiving income from interest is that oftentimes those interests are not compounded. This is a major factor when creating and preserving wealth for your retirement.
Supposing that you have 2 accounts, in one of the accounts you will earn 10% not compounded interest and in the second account, you will only earn 5% compounded interest a year.
In the first account you have $10,000 and in the second account, you have $4,000. At the end of 25 years, you will end up having in your first account $35,000 which will be equivalent to 150% return in 25 years or 6% not compounded annually on your initial principal. On the other side, we have the $4,000 account with a conservative compounded interest rate of 5% a year. By the end of the 25 years, your account value would have grown to $43,339 supposing that you had had never contributed to it. This would be a 983.47% growth in 25 years or almost 40% a year for that time period.
This is just a small example of how powerful compounded interest can be for your portfolio. If you want to try it by yourself you can use this free Compounded Interest Calculator to calculate different scenarios.
#2 – Purchasing An Annuity With An Income Rider that you Believe is earnings 5-7% but in Reality is Earning 3-4% or Even Less!
What are the issues with this strategy?
There’s a very common, insurance agent sales pitch that promise you a 6-7% guarantee. There’s an acceleration in the type of sales pitch given to anyone trying generate income in this low rate environment. Why is it so bad? Well, the main issue with this type of retirement income is that the numbers don’t add up! While having a fake 6-7% income base can be good for a secure part of your Portfolio. It’s important that you have other assets that can earn the rate of return that your retirement income analysis says you need.
If your retirement income analysis plan says you need a 5-7% rate of return to live the retirement of your dreams, travel, enjoy time with the grandkids and your true rate of return is 3-4% or even less then you won’t reach your goals. It’s that simple. Quick and easy fixes can be tempting, you might think that buying an annuity with a guaranteed rider of 5-7% and all of your work is done!
Sounds great on paper however you have to understand that the 5-7% that an income rider in an annuity offers you, it’s not a 5-7% in your principal’s growth. Often times, these annuities can earn 0% for 20 years so this is something you need to make sure your retirement income plan can handle. If you want to learn more about this concep and others. Sign up For Our Free Annuity and Retirement Class Below!
Sometimes buying an annuity can be beneficial for your retirement and sometimes it can harm your retirement. So don’t believe any advisor that tells you that you must buy an annuity to retire peacefully, every person and family is different, and it’s important to analyze and see the real numbers to then take an unbiased and educated decision for your retirement.
Option #3 – Regular Withdrawals A Non-Guaranteed Portfolio
Some advisors tend to say that instead of buying a Bond/CD or an Annuity to generate income for retirees, they should have a “professionally managed diversified portfolio” and think that would be the better option. Perhaps earning enough interest each year to preserve his principal while still making consistent withdrawals each year for income purposes.
When planning to generate income for retirees, one of the things you should have in mind is to allocate your assets in different investment vehicles. Having an experienced advisor is very important, a lot of advisors tend to allocate their client’s assets in different types of investments like mutual funds, bonds, annuities, but they are not diversifying effectively. The purpose of diversification should be to increase return while keeping risk at least equal or less. Another important aspect of diversification is protecting against more then one risk! Many advisors focus on only capital risk but inflation, Tax, and currency risk are also important risks a plan should have protection against.
What are the issues with this strategy?
One of the issues with this strategy is that it can work efficiently when you are young and do not live on your interest. But if you are retired you and your portfolio is not well diversified, you will be okay when the market performs well but when the market performs poorly you still will have to withdraw money from your portfolio in order to cover your living expenses and that can potentially reduce your equity and even run out of money.
Sometimes withdrawing income out every year during retirement makes the “bad” years much worse and can make the “good” years not nearly as good.
AnnuityEdu’s Possible Solutions
After reviewing the common disadvantages to strategies used to generate income for retirees and the dangers that they can expose you to. We can learn from the mistakes people make and position yourself to create a diversified All-Weather Allocation. By understanding your specific retirement income numbers. You’ll be much better informed and educated as to the appropriate percentage allocation between assets such as Cash, Bonds, Stocks, Gold, Real estate, and Annuities.
Therefore, it is important to run all the numbers through a financial plan in order to see what the best solution for your retirement is. Remember numbers never lie and Studies show having a plan means your much more likely to achieve your goals and enjoy a relaxing, comfortable, and,stress-free Retirement!
In my view, the definition of a good financial plan is one that is diversified through different uncorrelated investment vehicles that allow you to do a re-balance each year in order to maximize the benefits of your investments. Having Investments that can rise while others fall is key for diversification. It all comes down to an unbiased overview of the market and not trying to time the market or speculate with your retirement while at the same time not unintentionally position yourself for overly low returns because you won’t be able to earn enough interest to sustain your retirement income.
In conclusion, a well-diversified strategy can be the best way to generate income for retirees. Most Retiree’s will agree that the Ideal view of a perfect retirement income strategy is a customized plan. Your plan should be well thought out to withstand all possible types of economic environments. This will allow you to generate retirement income in good and bad market conditions without running out of money. If you share this view of having an ideal all weather strategy, schedule a meeting today.
Don’t Just Buy an Annuity – Know your numbers!
In order to generate income for retirees it is important to create a Retirement Income plan and cash flow analysis from a qualified advisor. A retirement income cash flow analysis will help you understand the strength and weaknesses of your current plan and how to improve it. By projecting Scenario’s with multiple annuities companies or even with zero annuities we can understand exactly which annuity, if any, is projected to provide the most income and upside to your plan.
Own your future today, the First step to Secure your Retirement is to run the numbers and Make a Plan Today!
We encourage you to take action and schedule a meeting with a Certified Financial Planner™ Professional to run the numbers and create a Retirement income Analysis customized for your specific situation. There is absolutely no cost or obligation, and you won’t have to worry about a high-pressure sales pitch. Allow yourself to become educated about this powerful option for generating a lifetime of safe, flexible retirement income while avoiding many of the income pitfalls.