Protected lifetime income isn't just a relic of the past. Today's retirement strategies provide the assurance many thought was lost.
If anything old can become new again, retirement planning is a prime example. Remember pensions? Those once-reliable sources of guaranteed income, now largely replaced by 401(k)s as companies cut costs. Yet having a dependable income stream in retirement is crucial. It alleviates fears of outliving your savings, which many consider a greater fear than death itself. It also serves as a buffer against market downturns, offering peace of mind in uncertain times. We consulted experts to learn how to transition from outdated methods to modern solutions as you approach retirement.
The Previous Approach (And Its Flaws)
“When businesses could no longer afford pensions, they switched to 401(k)s without providing adequate education,” says Marlo Stil, managing partner at a financial consulting firm in Rancho Mirage, California. “Employees lacked understanding of the critical need for guaranteed retirement income.”
Most employees receiving 401(k)s weren't informed that these plans alone wouldn't sustain them in retirement. While Social Security can help, it often falls short of covering monthly expenses. “Baby boomers are the first generation heavily reliant on defined contribution plans for their retirement lifestyle. The challenge is whether they can effectively manage and withdraw those funds,” notes Michael Finke, Ph.D., dean and Chief Academic Officer at a financial services college. “Excessive withdrawals could lead to depleting savings too soon.”
Overspending in a down market poses a significant risk. If the market dips during retirement, relying solely on monthly withdrawals can deplete your portfolio before it has a chance to recover, meaning each withdrawal impacts your overall savings.
Down markets are unavoidable, warns Stil. Relying solely on market investments can be risky. “Panic selling during downturns can prevent investors from re-entering the market in time to capitalize on recoveries,” she adds.
The Modern Approach (And Its Benefits)
Imagine not having to worry about losing your retirement peace of mind due to market fluctuations. Those with pensions have enjoyed this security. “Clients with pensions fared best during the Great Recession. They didn't stress over economic upheaval; they focused on enjoying life,” Stil recalls. “A significant portion of their retirement income was guaranteed.”
Witnessing this, Stil began encouraging clients to incorporate annuities with protected income streams into their retirement plans, providing a safeguard against future recessions. “We’ve included them as a shield against inevitable market downturns,” she states.
While having a 401(k) or IRA is vital, pairing these with an annuity to cover fixed expenses simplifies monthly withdrawal strategies. “You shouldn’t base your withdrawals on your expenses; rather, align your expenses with what you can afford to withdraw. However, projecting how long your savings will last can be complex, which is where an annuity is beneficial,” Stil explains.
Adopting the Modern Approach
Remember the “Choose Your Own Adventure” books? Think of annuities as a way to “Create Your Own Pension.” When used alongside other retirement accounts like 401(k)s or IRAs, annuities can ensure you consistently cover fixed expenses, regardless of market changes, Finke elaborates.
If you and your financial advisor determine that an annuity fits your needs, take a close look at your monthly budget to identify flexible versus non-flexible expenses. “Focus on essential costs like housing, healthcare, and food. If Social Security alone can't cover these, consider an annuity to guarantee income for as long as you live,” Finke suggests.
