Daily Progress, Jacksonville, TX

Opinion

July 11, 2014

The biggest risk to your retirement income

JACKSONVILLE — I started helping people plan for retirement over 30 years ago. It certainly was a lot simpler than. Many people had some type of pension plan from the company they had worked for over 30 years that guaranteed them a paycheck for the rest of their life. They had Social Security and maybe some personal savings from high interest CDs or a stock portfolio. We would create a plan for the remaining 20 to 25 years and it worked quite well.

Today, it isn’t that easy. Times have changed as very few people are blessed with company pensions anymore. The ones that have them typically worked for some form of government entity. In fact, only 19% of American workers today have a pension waiting for them. Of that 19%, almost 80% of them are government workers. Social Security is under pressure as 78 million Baby Boomers are starting to pour into their retirement years. Unfortunately, some people can’t retire like as planned because of two major stock market crashes since the year 2000 and a housing meltdown no one expected. Interest rates are at all-time lows, so CD interest and money market interest is terrible.

However, the biggest risk to retirement today is not the stock market, or low interest rates, or inflation. It isn’t the economy, or the deficit, or who is President. The biggest risk today is longevity risk – how long we’ll live.

Longevity risk is the risk of outliving your money. In 1900, average life expectancy was about 50. In 1933 when Social Security was created, life expectancy for a male was 62 and 65 for a female. Today, it’s 77 for a male and 79 for a female. Today, actuaries calculate there is a 50% chance that a 65-year-old married couple will see at least of them live to age 92. And, with the fastest growing age segment in our country being people living to age 100, there is increasing pressure on the Social Security system.  Many retirees who have relied on their stock portfolio, bond holdings, or mutual funds in the last 20 years have been disappointed. Now their biggest fear is longevity risk – are they going to outlive their money?

The only way to completely eliminate longevity risk is a guaranteed lifetime income from some type of lifetime income annuity. An annuity is a contract between you and an insurance company. Insurance companies have always been known for protecting people from the financial impact of dying too soon (life insurance). Now with people living so long, many insurance companies have shifted their focus to the risk of people living too long.  Annuities weren’t popular during the 1980s and 1990s when the stock market was booming. But now that we’ve seen two major stock market crashes in 13 years, annuities are back on the table as a viable way to create guaranteed lifetime income.

An annuity can either be “fixed” or “variable”. In a fixed annuity, the insurance company guarantees a certain interest rate based on the prevailing interest rates at the time you purchase the annuity. They will pay you a guaranteed income for the rest of your life and, in some instances, your spouse’s life. A variable annuity can also pay you a lifetime guaranteed income but you get to decide how to allocate your money across various asset classes like stocks and bonds. This may allow you to have a higher income in the future if the markets perform well. Most variable annuities offer their guaranteed income through a rider attached to the contract. These riders are not free and you should evaluate and compare the cost of these riders before purchasing them.

How much should you commit to an annuity? There is no one answer that fits everyone. The answer is determined primarily by your other sources of Social Security, a pension (if you have one), and personal savings. If there is a shortfall, an annuity from a strong insurance company may provide the difference. Again, costs and expenses of annuities vary so shop around.

Securities offered through Royal Alliance Associates, Inc. Member NASD, SIPC. Advisory services offered through Matt Montgomery, a Registered Investment Advisor, 1504 East Rusk, Jacksonville, Texas, 903-586-3494.

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