Whether you are about to enter retirement or you are in the early years of retirement, one concern many have is how to make sure they can generate an income they will not outlive. There are two basic ways to tackle this issue.
Find a relatively safe withdrawal rate:
Find a withdrawal rate that fits your age and portfolio. Generally speaking this is between 3% and 5% per year of your portfolio value. The rate depends on your age, life expectancy, the expected return and volatility of your portfolio. A financial advisor should be able to put the portfolio to the test by running computer simulations called Monte Carlo simulations that show how the withdrawal rate and portfolio perform in various market conditions. This may help you understand how your portfolio and withdrawal rate may hold up under good and bad market conditions. You can then make adjustments to the risk level of the portfolio or to your withdrawal rate if need be. If you are about to retire these simulations may help you to decide how much to draw from your portfolio. For example, it would be more valuable to know that your retirement account is designed to produce $300 per month than it is to know that the account balance is $100,000 since your bills are expressed normally in monthly amounts.
Transfer the risk using an annuity:
An annuity is literally defined as a series of payments at regular intervals. The annuity that most retirees are familiar with is Social Security. It is an annuity provided by the government. In the past many companies offered an annuity in the form of pensions. Today only a few do. You can create your own annuity with an insurance company. You purchase an annuity contract from an insurance company and they, in turn, will provide a specified income that you cannot outlive. It should be noted that like company pensions, the solvency of the insurance company is important. It should also be noted that once the annuity income is turned on or annuitized, like social security or a pension, it cannot be altered. Not all annuities must be annuitized. You may be able to take withdrawals from the contract that can start or stop. Insurance company annuities are sometimes criticized because of added expenses, higher commissions and surrender charges that can last for many years. These factors are important to consider, but if the product accomplishes your goals it still may be worth exploring. Often these products have extra benefits such as an enhanced death benefit to survivors or living benefits that provide income security to you that may help accomplish your objectives.
Daniel Finkel is a financial advisor with Savage and Associates, 4427 Talmadge Rd. Toledo, Ohio. He can be reached at 419/725- 7273. Securities and advisory services are offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Insurance services offered through Savage & Associates, Inc. which is not affiliated with Royal Alliance Associates, Inc. or registered as a broker-dealer or investment advisor.