Don’t Panic, A New Legacy Income Planning Tool Helps You Manage Your Retirement

Advisor Perspectives magazine reported last month that you will need much more in retirement savings today to produce the same amount of retirement income. Three times more!

Current low interest and dividend rates simply make it impossible, the article said, to replicate the income of just a few years ago. For instance, historically it has cost $26,267 in savings to produce $1,000 of annual income with a 50/50 portfolio.

Today you need about $79,118 to reap that $1,000.

Pay for the cost of retirement

The article may be a little gloomier than necessary. For example, it doesn’t take into account the higher income from annuity payments, or the possibility of drawdowns from the equity in your home. Or the fact that you must spend some of your savings (specifically the portion in an IRA) to comply with tax rules. But the authors are on the right track: we cannot plan for retirement as we did a couple of decades back.

Living Off Interest and Preserving Principal

In the past and as revealed in the study, retirees hoped the principal they had saved would create enough income in the form of interest and dividends to preserve their lifestyle — so they could leave the savings untouched as a safety net or as a legacy to their heirs.

In today’s low interest and dividend rate market, unless you have a huge amount of savings it doesn’t work, and even if it did mathematically it’s not the right approach.

A better approach addresses the current market conditions and allows retirees to continue to generate needed income while leaving a substantial legacy for the kids and grandkids.

Let’s focus on your personal after-tax savings, which you are not required to draw down during your lifetime. That is the money not in an IRA, 401(k) or similar retirement account, but money you earned, paid taxes on and then socked away in a bank or investment account. We’ll work with an example of a 70-year-old retiree with $2 million in personal savings.

The Income Allocation Approach to Lower the Cost of Retiring

Our retiree likely learned a few basic retirement rules from her parents:

  1. Live off interest and dividends
  2. Don’t touch principal

She’s finding those rules are not providing enough flexibility in today’s market. Fixed income investments are not generating enough income today (or expected to in the future). And she’s not comfortable chasing yields with higher-risk investments. She figures they call them junk bonds for a reason.

It’s important that our retiree change her mindset. Here are new rules that she can follow to boost her income and expand a financial legacy.

  1. Turn your savings into growing lifetime income
  2. Take a portion of that income each year and use it to augment your legacy.

In other words, pay yourself first.

The approach that I advise for #1 is called Income Allocation. It provides the roadmap to achieving income goals that might have at one time seemed incompatible. Income Allocation, as opposed to traditional asset allocation planning, examines how to earn the most from your savings with annuity payments, lower taxes and lower fees, as well as a mix of interest on bonds, dividends on stocks, and IRA withdrawals. You can adjust your plan to specific needs for the present and future.

My approach to #2 is a new tool called Legacy Income Planning. A portion of the income from your Income Allocation plan, for example, can be invested in tax-favored accounts. You can choose to invest some of that income — money you don’t need at the moment — into accounts that will boost your legacy.

A New Way of Thinking about Legacy Planning

An Income Allocation plan designed specifically for you provides more income. A Legacy Income Plan allows you to invest some of your added income and boost that legacy. You will have the flexibility to use your income however you choose; perhaps you decide to pay your mortgage with it one year instead of investing. You can restart your Legacy Income Plan the next year if you wish.

In the example below, our retiree decides to manage both her income and legacy with her savings of $2 million, based on assumptions she considers reasonable.

Her Income Plan: Her income at age 70 is $62,000 and it grows each year, reaching $115,000 for a cumulative total of $2.4 million. Her legacy will be $1.9 million.

Her Legacy Income Plan: She sets aside $12,000 of income per year and increases it by 2% a year. Because her legacy is for the next generation, she is able to invest more aggressively, but with less stress, with a dollar cost averaging approach. Under this approach, she will end up with a legacy of over $2.7 million — up 40% over her original income plan.

With the extra income, our retiree could also consider alternatives to expanding a legacy, versus the one I describe above. She might buy life insurance with her extra income to provide a legacy payoff. She might be concerned about long-term care as she gets older and use that income to buy long-term care insurance. She could also give money as gifts to her children, grandchildren and others while she is alive and be able to enjoy the appreciation of the recipients.

Comparison With A Traditional Asset Allocation Plan

As I wrote previously, the Retirement Trifecta of income, legacy and low risk is possible despite low interest rates. It requires an overall view of your savings and financial options that must change with the changing markets.

Compared against a traditional asset allocation plan, our retiree above will enjoy a 41% advantage in cumulative income and a 2.5% advantage in legacy. And the guaranteed annuity payments provide additional peace of mind. Of course, the Legacy Income Planning can be adjusted to rebalance the advantages between income and legacy.

By managing your retirement savings with common sense and easy-to-achieve tactics, you can earn more income while also leaving a significant gift to your heirs.

Are you ready to create an Income Allocation plan that creates the most income and legacy from your savings? Visit Go2Income for more information on how Income Allocation can help you balance your retirement priorities or contact me to discuss your situation.