Jerry Golden on Retirement

Even the Experts Can’t Figure Out How to Plan for Retirement Income

September 18, 2021 By Jerry Golden in Income Allocation Tags: annuity payments, Go2Income, Income allocation, Jerry Golden, retirement income

An article in The New York Times, “How to Enjoy Retirement Without Going Broke,” is a reminder that experts — from Nobel Prize winners to financial advisors — are challenged by planning for retirement income. It also showed that those who provide investment advice are stymied by this almost universal problem for a large part of the retiree market.

On the academic side:

“It’s really nasty. It’s the nastiest, hardest problem I’ve ever looked at,” said William Sharpe, who won the Nobel Prize in economics and reported his progress on the problem of how retirees can manage their financial assets without running out of money: “I can’t say I’ve found some magic solution, because I haven’t.”

On the advisor side:

One advisory firm appears more confident than the academics with brochures touting “7 innovative ways to generate income from your nest egg.” On the other hand, they also “hate annuities” and their firm’s reward system – we make money when you do – is based on having clients take market risk, rather than providing secure income.

The Challenges Under Consideration

From academic to practicing advisor, why do they find it so challenging to figure out a smarter way to create a plan for retirement income — even while the average visitor to Go2Income gets the idea of income allocation? Here are a few reasons the experts don’t get it:

Most of the traditional research or practice for savers has been about asset allocation and the techniques to improve or manage the returns on investing.
The regulatory structure permits an advisor to be a fiduciary even though the advisor is not required at least to consider other financial products like income annuities that can deliver tax-efficient lifetime income.
For high-end advisors a large part of their practice is designed for high net-worth individuals who have sufficient retirement savings to live off the interest and dividends, avoiding the risk of running through their funds.
The algorithm that integrates annuity payments into an income allocation plan requires an understanding of income annuities, particularly the differences with annuities designed for accumulation.
These experts often confuse the market value of an investment with its liquidity. Income annuities, just like a pension or Social Security, have a market value – but with no liquidity. The chart below shows for a typical income allocation plan the combination of the market value/liquidity of investment portfolios and the market value of future guaranteed annuity payments. That latter has significant value, creating stability in income as well as peace of mind.

Income Allocation Plan for Female 70; $2 Million Savings; 50% Rollover IRA
Projection of Fair Market Value of Plan

Note that the market value of this Plan starts at the initial retirement savings of $2 million and reaches $2.25 million at age 95. Under this Plan, the retiree wanted the value of the investment portfolios to equal $2 million at age 95. The retiree accomplishes this by reinvesting a portion of the rollover IRA distributions into a designated legacy account. The amount reinvested in this Plan is approximately $4,000 per year.

Importantly, in this Plan the income starts at $102,000 and grows to $140,000 at age 85 and $160,000 at age 95. Here’s a breakdown of the Sources of Income under this Plan – which is the basis of the Income Allocation. Note that this income will be reduced by taxes and the reinvested income into the designated legacy account.

Income Allocation Plan for Female 70, $2 Million Savings, 50% Rollover IRA
Projection of Sources of Income

So, you can see how Income Allocation works by substantially boosting income over a lifetime, while at the same time understanding the market value of a Plan.

Outperform The Experts to Plan for Retirement Income

Other experts were quoted about annuity payments in the article referred to above, “The purchaser has to write a big check to get a series of small checks, which may simply look like a bad deal to a naïve consumer.” Our experience is that visitors to Go2Income understand the idea of annuity payments, just as they understand Social Security and pension payments.

What About Low-Cost Robo-Advisors?

These advisors are new on the scene and don’t have a history with high net-worth investors, so they could approach advising on a Plan for Retirement Income with a fresh pair of eyes. So far, however, they seem to take the de-accumulation approach, albeit with lower fees. We expect that once they become knowledgeable around income annuities, they’ll see that Income Allocation can work withing their advisory model of low fee and better results.

Retirees who educate themselves know they can do better.

As I explained in an earlier blog, everyday consumers can follow a few simple steps to create true income that lasts a lifetime and is low-risk. Creating an Income Allocation Plan allows you to look at many planning alternatives, and to decide — based on your own expertise — which ones are the best for you.

Income Allocation Planning at Go2Income.com enables you to design and evaluate your own plan for retirement. For guidance and answers to other retirement questions, contact me at Ask Jerry.

Lower Your Future Income Risk by Taking Action Now

August 29, 2021 By Jerry Golden in Income Allocation Tags: adjust portfolio, annuity payments, Income allocation, Jerry Golden, retirement income

The news about the stock market has been wonderful for a lot of your retirement savings. The portion of your portfolio invested in the stock market has recovered from the thrashing the pandemic delivered and, if it followed the broad market, it has reached new highs.

However, other aspects of the economy aren’t necessarily the most favorable for individuals entering or in retirement:

Interest rates are still low by historical standards.
Expenses, such as travel, food and your car, have increased. Home prices have jumped too.
Federal income tax rates may be going up.
And, of course, there’s always the possibility of a stock market correction

Finally, some investors took their money out of the markets during the crash of 2020 and stayed on the sidelines during the historic upswing.

All of that means the income from your savings may not cover current or future expenses. So, the decisions you make for your retirement income plan are more important than ever.

But don’t worry. A simple six-point point program that you can use any time — not just during times of uncertainty — will help you determine whether you need to take some action to keep your retirement plan on track.

Six ways to take control of your retirement

1. Create a plan for retirement income

Most importantly you should have a plan for retirement income. It doesn’t have to be elaborate, but it should be recorded and updated at least annually; it will help to guide your decisions going forward. The plan should be about income allocation — not asset allocation. An Income Allocation plan recommends that you allocate your income among interest, dividends, annuity payments and IRA withdrawals. And in some cases, drawing down or extracting equity from a primary residence. For more on how an Income Allocation model works, please read Fill Your Income Gaps — And Then Some.

2 . Generate more income from your retirement savings

A lot of retirees with savings in both IRA or 401(k) accounts, and personal (after-tax) savings follow this strategy: (1) Take required minimum distributions from your IRA or 401(k), and (2) Spend interest and dividends from personal savings. They cover any shortfall in income with capital withdrawals or hoped–for capital gains. These latter two sources, however, should not beconsidered “income,” because they are dependent on the market.

An Income Allocation Plan adds annuity payments to your monthly income, providing cash you can count on for life that also offers tax advantages. Annuity payments can start immediately and be a multiple of interest you’d earn on your savings. Or they can start in the future, enabling you, for example, to invest your rollover IRA savings more aggressively.

3. Build in more security

Investors understand the need for security in their retirement planning. For example, a large percentage of 401(k) participants invest their savings in target date funds, which automatically reduce risky holdings in their account as they near retirement.

Once investors retire, increasing income from annuity payments can provide similar security — guaranteed income for life no matter how long you live. Research shows that consumers generally do not reap all the rewards of stock market gains because they sell their holdings during bad times and are not invested when the market begins to climb again. A concentration on income, with a percentage of your retirement income coming from annuity payments, relieves that pressure and allows you to stay the course in volatile markets. In other words, the money you have invested in stocks can stay there, and you have time to let the market recover.

4. Minimize your stress level

Besides setting up a plan that is less dependent on market fluctuations, you can look for an adviser who will help manage your plan and make real-time adjustments to that plan to reflect changes in the market and your personal situation. The difference is this: You and your adviser are managing your plan, not just your investments.

Using an adviser to manage your plan and a low-cost robo-adviser to manage your investments could be the perfect combination. Look for your adviser to deliver holistic planning that considers your income goal and your employment-related guaranteed income, while pointing out the potential risk of withdrawing capital to manage any income gap.

5. Lower your fees

While you’ll want to keep a portion of your savings invested in the market, make sure you invest in diversified, low-cost index funds, ETFs or direct indexing portfolios. These investments can be managed within an automated, or “robo-adviser” platform, to cut your fees in half or more. Robo-platforms can even suggest investment models and allow you to adjust those models if you choose.

When your objective is a plan for retirement income, think about the fees you’re paying as coming directly out of your income rather than out of your savings. With a full-service advisory fee averaging 1% of assets under management, they can represent a large percentage of your income.

For more on how to cut your fees, please see How to Cut Your Investment Fees in Half.

6. Lower your tax rate

Conventional wisdom says that when you generate more income, your tax rate will be higher, too. But your taxes are very much dependent on the source and composition of the income, and by following an Income Allocation approach on your personal savings as well, you can lower your retirement tax rate. As suggested above, a portion of annuity payments made from your personal savings is free from tax during the first 15 or 20 years.

(For more on that, please see How to Lower Your Retirement Tax Rate to Less Than 10%.)

Putting the numbers together

The six principles listed above show the power and flexibility of an income allocation planning system and demonstrate how one simple move — adding annuity payments — can positively affect income, tax rate, fees and your peace of mind.

How much more income could you expect by developing an Income Allocation plan? The chart below shows how a 70-year-old man with $1 million in savings, and 50% in rollover IRA using a robo-adviser investment platform, enhances his retirement finances by switching some of his bond investments into income annuities generating lifetime annuity payments.

Comparison of Plan With and Without Annuity Payments

Here are some of the highlights:

First year income from the plan with annuity payments is $14,000 per year higher than the plan without annuity payments.
Cumulative income to age 95 is $420,000 higher.
Assuming $36,000 from Social Security benefits, the first-year retirement tax rate is less than 4% on the plan with annuity payments vs. nearly 7% on the plan without annuity payments.
And to reduce stress, a lower percentage of the income is subject to market risk.

Importantly, that higher income and lower taxes can be spent, gifted or reinvested for a future legacy.

An extra benefit: You can apply those principles to your retirement plan at any time, wherever the market is.

Are you a DIY investor who just wants some guidance to make sure you are on the right track with your income plan? Income Allocation Planning at Go2Income enables you to design your own plan to address the retirement issues you are facing now and will continue to face in the future. For answers to other retirement questions, contact me at Ask Jerry.

Fill Your Retirement Income Gaps – and Even More

June 24, 2021 By Jerry Golden in Income Allocation Tags: Gaps, Income allocation, Jerry Golden, retirement income

I have some friends who developed a wonderful estate plan for their kids that involves the purchase of a large survivorship life insurance policy. However, because of today’s lower interest rates, the projected premiums on their policy have increased significantly. That means some of the money they were putting into a 529 plan might have to be diverted to pay those rising premiums.

This raises a common question about future legacy vs. finding money for shorter-term needs: Which one should take priority? (They are both important; there will have to be some trade-offs, but thoughtful planning can lead to less disruption than you might assume.)

You could describe this as a problem for the 1%, but most of us — not just our estate planning friends — need income for legacy planning, gifting, bucket list items or essential living expenses, and we need to address these potential retirement income gaps either now or in the future.

How to Generate an Extra $20,000 a Year in Retirement

May 17, 2021 By Jerry Golden in Income Allocation Tags: Income allocation, Jerry Golden, Retirement Planning, safe income

That amount of money could change your life. Let me help.

Many retirement plans allocate your savings to varied stock and bond portfolios and, based on historic averages, tell you how much income those assets might generate until you reach a certain age, such as 90. That planning does not typically account for unexpected expenses, such as health care or a storm-damaged roof, and usually ignores what happens if you live longer than planned.

Better retirement planning ensures you have basic income for life along with a plan for meeting those extra expenses.

Retirement Income Plan — Better Than a Pension?

April 6, 2021 By Jerry Golden in Income Allocation Tags: annuity payments, better than a pension, Income allocation, Income annuities, Jerry Golden, lower investment fees, lower taxes, retirement income

For two generations, people have been saving for retirement. Originally, indirectly by their employer; and then on their own.

After WWII, the middle class of the Silent Generation enjoyed a great economy and often also benefited from the company pension, which promised to guarantee secure income in the after-work years.

Baby Boomers began to lose pensions as an employer benefit but gained the IRA and 401(k), which required them to save on their own with in some cases an employer-matching contribution.

Now there are tens of millions of Boomers with trillions of dollars in these qualified savings accounts invested in stocks, bonds and cash, and several trillions of dollars of equity in their homes. Unlike the pension era, these Boomers have to decide how to convert those savings into a lifetime of retirement income.

A recent article in Employee Benefit News points out that “traditional retirement plans aren’t enough to secure a worker’s financial future anymore.” Instead, everyday employees need help not only with savings, but often with unexpected health care costs and other emergency expenses.

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