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Strategies to Avoid Outliving Your Retirement Savings

In The Wall Street Journal article “How to Make Your Savings Outlive You,” Jonathan Clements talks about a recently written paper by two financial experts.  Laurence Siegel from the CFA Institute Research Foundation and M. Barton Waring, retired from Barclays Global Investors, warn consumers not to expect fixed income from risky investments.  Their advice stems from many experts still recommending the 4% withdrawal method.  This retirement financing method says that you should be able to withdraw 4% from your investments yearly and your money should last as long as you live.  At the end of each year, you adjust your withdrawals for inflation.  The key word here is should.  There are a few problems that can arise using this method for financing your retirement.  You don’t know how long you will live, what the inflation rate will be, or how much your investments will gain or lose.  Betting on the 4% withdrawal method in retirement is pretty risky and could leave you without any retirement savings left while you are still alive.

One option for creating retirement income that Mr. Siegel and Mr. Waring recommend uses a mix of savings, an immediate annuity and Social Security income.  They say that you can delay Social Security until age 70, which will make your payments higher.  During the time from retirement until you start receiving Social Security income, you can live off of your savings.  For any additional income needs with your Social Security payments, you can purchase a fixed immediate annuity with some of your remaining retirement savings.  A different option would be to ladder inflation-indexed Treasury bonds to create predictable income.  The longest maturity is 30 years out though, so this strategy does not guarantee lifetime income.

For those who really want to keep their money in stocks and bonds, the paper authors recommend recalculating the percentage that you can safely withdraw from your investments each year.  They call it an “annual recalculated virtual annuity” that takes into account the inflation rate changes, your expenses and how your investments have changed over the year.  The main drawback of this strategy is that it is complex and most consumers would not be able to do it without expert help.  Another drawback is that you typically spend less in your early retirement years than you could have because you are preparing for later retirement.

Using that strategy still does not guarantee that your money will last throughout your lifetime.  This is why a combination plan using annuities and investments is often a popular choice.  You guarantee a stream of income that you won’t outlive, but you can still keep some of your savings in stocks and bonds in the hopes to increase the value.  The authors say that you could use 75% of your savings for their so-called virtual annuity and then purchase a deferred income annuity with all or some of the other 25% of your savings.  A deferred income annuity is longevity insurance to protect you from outliving your money.  Payments typically start at some date far into the future and pay you for the rest of your life.  If you still have money left in your investments when you start receiving payments from your annuity, that is extra to spend or pass onto your heirs.

Retirement planning is complex and typically requires the help of an expert.  Research all of the possible outcomes before committing to a plan that doesn’t include the guaranteed income from an annuity.  Whether you use an immediate annuity with Social Security or a deferred income annuity with investment drawdown, a combination plan usually offers you the best chance to avoid outliving your retirement savings.

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