I have been working in the retirement planning business for almost 30 years. Through that time, I have evolved in my thought process on how to best plan for retirement. I have settled on the fact that retirement is not about assets, but it is about income. Depending on who you ask for advice, you are likely to get different opinions on the best way to create this income, with options ranging from fixed accounts to annuities. When I first started in the industry, fixed accounts paid over 10% interest. It seemed like a great deal. Ten percent and no risk. Those same accounts now pay between 1-2%. If you had a million dollars set aside for retirement without considering taxes, you would have started with $100,000 and now would have $10,000 – $20,000 at a time when expenses are much higher.
Seeing that interest rates were declining, I started looking at portfolios to create income, which was a great option throughout the nineties. The gains exceeded those of fixed interest by a large margin, appearing promising for the future. However, as evident from the 2000s, the sequence of returns can heavily affect the portfolio. The decade starting in the year 2000 is the only negative return decade in history. The challenge is not knowing what the future holds. There is a reason that investments state that past performance does not indicate future performance.
To offset this risk, alternative investments were expanded to flatten the fluctuations. This worked until 2008 when everything fell apart. Since 2008 we have seen significant growth in annuities.
Honestly, the toughest part of annuities is the bad reputation that they previously had. They were expensive and the performance was less than desirable. But, like people, all annuities are not the same. Innovations like fixed index annuities that allow you to add benefits to deal with long-term care have made them more attractive. They also provide what neither of the other options can provide: guaranteed income for life. Survey after survey states that fear of running out of money is the number-one fear of retirement. Annuities are a way to eliminate at least part of that fear.
The last area is a relatively new area for most, and that is using life insurance for retirement income. Past attempts with variable insurance products have faced challenges due to the combination of insurance costs and downturns in the market, rendering them less favorable. By strategically overfunding indexed universal life, you can have tax-efficient income that might serve as an alternative to traditional qualified plans if you’re in good health. These are just a few of the options I have personally experienced throughout my career. If you are not evolving, you are likely to end up like the fixed-interest products, getting less than you need in retirement. The reality is that income in retirement is needed and should be the first objective that is solved.
Taxes make up a significant part of the plan, as well as how to pass along what is left after death. I believe that retirement should be similar to your working life. You must create your paycheck through a combination of Social Security, annuities, and other consistent income. It must be something that is dependable and that you cannot outlive. The second part is similar to setting aside savings and investing them for growth when you were still working. The market’s short-term unpredictability poses challenges even for experts, but it remains a solid long-term option. Finally, if you are not going to need all your assets, consider ways to pass them on to family or faith in a tax-efficient way.
I provide a free initial consultation to all and would love to show you how to create a retirement income plan that you can rely on. To schedule an appointment, contact my office at (828) 599-0299 or morgan.wylie@retirerm.com. We would love to help.
