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Two Just-Plain-Wrong Retirement Solutions

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Sometimes a sub-optimal solution is almost as damaging as the problem itself. Financial advisors appropriately want to help assure that their retired clients do not have to sell equities at depressed prices. Retirees who need income every month to meet regular expenses cannot wait for a market recovery: They need money now, as well as in 30, 60 or 90 days. So advisors need a strategy that produces regular income, but avoids having to sell equities in down markets. There are two strategies advisors are using that are sub-optimal solutions.

Some advisors put a significant amount of money in cash and use it as a “stash” for the client’s monthly living expenses. This approach requires that an amount of money not be invested, meaning it is not producing income for the client.  The overall return on the client’s portfolio is therefore driven down.

A more common approach is to put a significant amount of money in bonds. Most advisors I speak with say that they plan on increasing the allocation to bonds as their retired clients age. But high allocations to bonds reduce the potential return on the portfolio. And as the bond portion increases, the expected return decreases. Furthermore, inflation increases the cost of living in retirement and many older people face significantly higher costs in older age for pharmaceuticals and long-term care. Higher costs later in retirement, combined with reduced returns, obviously cause problems.

There is a better way. There are a number of financial products available now (with more coming) specifically designed to produce stable monthly income. Some of these products guarantee to pay stable monthly income for life, others do not. Some use equities and use techniques to reduce the risk of having to take regular income in depressed markets. Others use mortality risk pooling to produce a higher cash flow from fixed investments and still guarantee income for life.

Among these income products are: payout mutual funds, standalone living benefits, immediate annuities, annuities with guaranteed minimum withdrawal benefits and deferred income annuities. Very few advisors I have spoken with know them all; many are familiar with one or two, most do not use any of these products at all.

I strongly urge advisors to study these products and keep up with new developments. There are major differences between investing for people who are accumulating for retirement and investing for people who are retired and need regular income for their living expenses.  Accumulators typically have one goal: prudently seek to maximize growth. Retirees who need regular income have two goals: they still need growth for longer life spans and they need regular income withdrawn from their account. This second goal needs new strategies. Looking to the new generation of retirement income products is the right way to begin.


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