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Retirement Planning > Retirement Investing

Time to reassess your retirement situation

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Many retired people or those nearing retirement are nervous about what the financial markets have done to their retirement nest egg. While it is no fun to watch the markets go up and down, it is even harder to have to deplete accounts in order to pay bills while the market is down. This double dip is worrisome for most.

People are told to invest in the stock market even though the markets are volatile. Common wisdom says to stay invested with a portfolio allocation that fits your risk tolerance. But, if funds must be withdrawn to pay bills, this can cause the portfolio to fail years from now.

The 4 percent solution
There is a solution. Most income distribution modeling shows you should not take more than 4 percent from a portfolio in a given year. If there is growth over and above this, the excess will help offset inflation. Some even more conservative models suggest only 3 percent is the appropriate withdrawal amount. Regardless the concept is the same–there is no tolerance for depleted capital.

The solution is simple. A variable annuity with an “income for life” rider guarantees a 5 percent withdrawal can be made annually from the account. But, more importantly, it enables one to stay fully invested in the stock market with no worries. Why? Because the annuity guarantees the “protected value” will never decline. Let’s say you have a client with $500,000 in his retirement account. If this money is placed into an annuity, he will receive $25,000 for life. At the same time, their actual account is invested in the stock market. Suppose it declines to $200,000–he will still receive 5 percent for life, or $25,000.

If the client’s actual account has a great year and grows beyond the $500,000, then the protected account resets to the new amount and his 5 percent increases based on the new value.

There are a couple of disclosures to reflect on when considering this program, however. First, the fees are quite high for an equity account. They are upwards of 3 percent annually. But remember, there is guaranteed income for life on the protected account. That has a cost. There is also a surrender charge. But, the surrender charge declines and often is 0 percent after six or seven years. So be sure to check how long your client will be subject to the penalty.

Finally, if your client chooses to liquidate, he will only receive his actual account. The protected account is never available for liquidation. But is this really a problem? If you were in the market and it declined, you would receive only the value of the actual account. In this case the only real loss is the higher fee.