You know what they say about the best laid plans going wrong, well with what has happened in the financial world this year, that’s what has happened to countless retirement plans.
For example, let’s look at a hypothetical retiree who, until recently, thought she was all set. Our sample investor put off formalizing his retirement income plan until he started taking Social Security at age 70 and made withdrawals from his rollover IRA. It was December 2021. Inflation seemed to be reasonably under control; the markets performed well; and with 50% of his $2 million portfolio invested in bonds, he was quite conservative.
Social Security and a pension of $60,000 a year helped her reach her initial income goal of $150,000. The $90,000 balance came from his $2 million in retirement savings.
Even after having to withdraw some of his personal savings to meet his income goal, he was also leaving a strong legacy, taking on historic market returns. He used a traditional income planning approach that relied only on his investments. She was fine and felt reasonably safe.
As with many like her, including financial experts, she wasn’t anticipating market gyrations by anything like what happened next.
What happened in the first 6 months of 2022?
Sometimes the consequence of market volatility is that you simply have to reduce your spending during unexpected rocky patches. The same could happen to you after retirement if your plan doesn’t take into account real-life possibilities. So here’s what’s happened so far in 2022.
First, inflation hit, rising above 8%. A recent poll found that in response to rising inflation, 35% of people planning for retirement are cutting back on social activities and 28% are spending less on travel to maintain or increase their retirement contributions. Our investor was not ready to make radical changes to her lifestyle. Second, due to market declines, the share of their investment portfolios in growth stocks fell more than 30% since the beginning of 2022. (The share of high-dividend stocks is held for a while, but ended up falling more than 8%). Third, the value of his fixed-income portfolio fell by about 14%, draining both his rollover IRA and personal savings accounts. She was definitely not ready for this. Fourth, the combined effect was that the savings I used to draw income (the rollover IRA plus some personal savings) were reduced by more than 20%. His bonds had not protected him.
What did these developments do to your retirement income plan?
Many individuals become shy at times like these and won’t even talk about how long-term results might affect their plan, but our investor wanted to completely update his plan to current market conditions. Here’s what he discovered.
When factoring in inflation, our investor figured his living expenses would increase by $10,000 per year, bringing his income goal to $160,000. (She believed there might be a lower inflation rate in the future.) Her Social Security and pension will still bring in $60,000 a year (good for that), so her retirement savings goal is now $100,000.
With his retirement savings below $1.6 million, using the above strategy will yield only $74,000 a year in initial income, $26,000 more than his new budget. If you believe in a lower inflation rate in the future, say 1%, your plan income would be $82,000, even if it doesn’t reach $18,000. Drawing more of your savings to make up for this shortfall reduces your legacy and even increases your risk of running out of money.
Let’s turn back the clock and see how a Go2Income plan would have gone.
What you can get from a Go2Income plan
The key differences between Go2Income and traditional income planning are:
Annuity payments as a source of income. Lower allocation to stocks in general, but with a higher allocation to high-dividend stocks. An algorithm that integrates all sources of income.
So, let’s see how this plan would have worked.
His initial savings income in December 2021 would have been more than $100,000, giving him a $10,000 cushion against his original $90,000 in savings. And because of the annuity payments in the compound, more of the income would be safe and less taxable.
By the end of June 2022 with the different allocation to shares in the Go2Income plan, the value of your invested savings would have fallen by just $245,000, compared to $400,000 in a traditional plan. His income under an upgraded plan supported by lower savings has dropped, but only to $91,000.
To reach her new goal of $100,000 in savings, she is willing to assume a lower inflation rate of 1%, thinking that she can adjust gradually, and that her new income is $100,000, which which brings the total back over $160,000.
Of course, she can’t go back in time.
Convert your traditional plan to a Go2Income plan?
While he gets away with not adopting Go2Income sooner, he doesn’t want to compound his problems. So what would a new Go2Income plan look like from the $1.6 million of the original plan? He was pleasantly surprised to find that he would still be fine. The reasons why include the above, plus one more: Annuities are even more attractive now because of rising interest rates.
With no change in assumptions, your income under a new Go2Income plan as of June 30, 2022 would be $88,000, even starting with less than $1.6 million in savings; if he lowers his inflation expectation to 1% per year, his income returns to $97,000. Here is a photo of their new plan.
Note: DIA means dividends, interest and annual payments; SPIA stands for Single Premium Immediate Annuity.
When thinking about making a change in your planning method, you should make sure that, wherever possible, you consider the tax consequences of such a move. Of course, she can stay with her current investment advisors or manage the money herself if she prefers.
It was a very hard six months and I could go on. She is grateful to be able to make her retirement plans more secure.
Final thoughts
However, ever the thoughtful investor, he asked if annuity rates could rise further in the future. Although there is very likely a risk of delay, lower cash flow, higher risk exposure and worse tax treatment. The smart compromise may be to implement immediate annuity payments now and delay future annuity payments.
By the way, you shouldn’t beat yourself up too much about not adopting a Go2Income plan sooner. While there was a financial loss for delaying, the real loss was lost sleep. As we said, Go2Income is designed to provide a more secure retirement.
We can help you if you have a similar situation. Visit Go2Income for free custom plan which offers both a high initial income and growing lifetime incomeas well as long term savings.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check the records of the advisers with the SEC or with FINRA.
President, Golden Retirement Advisors Inc.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. More information at Go2income.comwhere consumers can explore all types of income annuity options, anonymously and at no cost.
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