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Lifetime income and the new economy

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We barely have three months to plan for a tax hike no one can stop. That is the increase caused by the Affordable Care Act, surtaxes on dividends, rental income and other passive income. Deductions are being stacked to make them less attainable by the middle class and seniors.

This is coming at a time when talk of the debt ceiling will dominate the headlines, the Bush tax cuts will either be extended or allowed to expire, inflation and so much more confront our retirees and future retirees.

How do guaranteed income plans fit in the equation? They fit perfectly on an emotional and sound financial planning level. Most clients will tell us it hurts more when they lose money compared to the excitement of when their accounts gain value. Many also tell us the earnings they receive do not alter their lifestyle, especially those nearing retirement.

Yet as advisors we are stuck in the rut of preaching return, and to be clear it’s an assumed rate of returnemphasis on the assumed. We have no idea what the market will do, let alone what a diversified portfolio or capped product will do. Yet we try to plan for their lifetime income and their ability to survive on these types of returns.

I’m thinking of starting a new business, “The Matt Golab Weather Advisory Group.” You tell me what days you’d like to have sun and I’ll research the data based on all the records and will tell you the probability of success.

Sounds ridiculous doesn’t it? But we tell people to base their livelihood on these types of assumptions: Earn 5 percent to 6 percent and withdraw 4 percent to 5 percent, without taking into consideration the withdrawals in the down years and the up years. It’s like sending a train downhill in the negative years, and then because of our withdrawals and working with a smaller balance, sending a train uphill. I believe it is financial malpractice.

Insurance companies, the original pension providers, have created a plan that meets both the emotional need and financial desires of our clients. These plans allow a guaranteed income floor, say, 7 percent, for future income that we can then base our lifetime income withdrawals on. Yes, I know it’s not a cash value or interest rate. However, some of these insurance plans have a cash component that can add to that income floor and can increase their future income.

It makes sense on a financial planning level to insure longevity. And it also makes sense on an emotional level; so many clients come back to me and thank me for taking the stressful burden of the market from their shoulders.

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