I have some friends who developed a wonderful estate plan for their kids that involves the purchase of a large survivorship life insurance policy. Because of lower interest rates the projected premiums on their policy have increased significantly, meaning the money they were putting into a 529 plan might have to be diverted. This raises a continuing question about future legacy vs. shorter-term college funding.
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.
Longevity — An Unplanned-for Income Gap
By the way, if you are in or near retirement you should start planning to live longer. A 2018 study showed that men aged 60 to 79 had a biological age four years less than the men in an earlier generation, in part because of improvements in lifestyle and medications. This suggests that not only is this group living longer, but they’re also staying healthier longer.
(Contrast these findings to a recent study of a younger age group 25 to 64 which saw life expectancy get worse, but for reasons mostly related to lifestyle and other factors. Also, remember there’s a difference between life expectancy from birth vs life expectancy from age 60.)
If you’re in the 60 and older group, these developments may mean that many of you will need more money than our formal or informal plans permit. I have pointed out before that traditional retirement planning often advises retirees to simply spend less when their savings are diminishing because of market corrections or longevity. Maybe you can fend off outright disaster that way, but does it offer the best peace of mind or happiness? It certainly results in a smaller financial legacy to your heirs.
As a cautionary example, the retiree I profiled in my previous column created an income plan that would pay her $160,000 a year at age 70. To maintain her lifestyle and income value, even with modest inflation, she needs to generate $250,000 at age 95. Cutting back occasionally means she may have to give up her lifestyle and legacy plans during last years of her long life. That’s not her goal.
Fifty percent of us live beyond our life expectancy as calculated by insurance company actuaries. And failure to plan beyond life expectancy creates the Longevity Income Gap. Perhaps you have planned for living longer than your life expectancy. But ask yourself, will your income sustain itself or decline during that period?
Two More Types of Income Gap
Besides the Longevity Income Gap, which derives from a combination of good news, (living longer and healthier lives) and poor planning, (not planning for lifetime income) there are two other income gaps to consider:
- Your Total Income Gap: This is the difference between your income goal (designed to cover both your essential living expenses, and your bucket list expenses) and the amount of guaranteed lifetime income you’ve earned during your employment, including Social Security, pension benefits, and any deferred compensation. For our example retiree, her Total Income Gap is nearly $100,000 per year, or the difference between her $160,000 income goal and $62,400 in Social Security and pension benefits. She needs to generate nearly 5% per year from her $2 million in retirement savings, plus growth, to meet her income goal.
- Your Planning Income Gap: The second gap represents the portion of her income goal not met by her planned-for income. In our friend’s situation a traditional plan that delivers 4% in income or $80,000 per year from her savings has a Planning income Gap of nearly $20,000.
As I have stated before, the two typical choices for our friend when “bad things happen” to her plan are spending less or spending down her savings. Spending down your savings runs the risk of forcing a major mid-course correction, which is the last thing our friend or her kids want to do when she’s healthy and enjoying her life.
How to Bridge Retirement Income Gaps With a Smarter Plan
Consider an alternative to the traditional retirement plan – an Income Allocation plan which recommends that you allocate your income into interest, dividends, annuity payments and IRA withdrawals.
The solution is pretty straightforward.
- Add annuity payments starting today and continuing for your life. They will replace a healthy portion of your bond investments in your personal savings accounts. What you are doing is adding to your work-related guaranteed income and reducing your Total Income Gap. In our friend’s case her TIG is reduced from $100,000 to $70,000.
- Invest in high dividend, value-oriented ETFs that deliver increasing income, potential for growth in share value, low fees and lower taxes. Add some fixed-income ETFs with AI management.
- Manage your IRA withdrawals from an account invested in a balanced portfolio of low fee growth and fixed-income ETFs.
- If the above steps don’t eliminate the Planning Income Gap, consider a modest drawdown of equity in a primary residence until age 85, and longevity income for life thereafter.
We’re convinced that this approach will produce the smartest retirement income plan.
A New Difference
If you have been reading my blogs for a while, you will recognize the advice I consistently impart: Develop guaranteed lifetime income from your savings as much possible, take advantage of low-fee and low-tax strategies, and readjust along the way to maintain your advantage without cutting back on your lifestyle. Income Allocation delivers more income with less risk.
So what’s different about my advice today? We now can deliver holistic planning that considers your income goal and your employment-related guaranteed income, plus demonstrates the potential impact of withdrawing capital from a traditional plan vs. as an Income Allocation plan.
Our goal is to fill your income gap, and to meet a stretch income goal — without stretching your risks.
Are you a DIY investor who just wants some guidance to make sure you are on the right track with your income plan? Go2Income helps you build a retirement based on your specific needs and wants. Go2Income supplies the information and options; you make the decisions.