by Tracy L. Sherwood, CFP™
Many retirees are drawn to advertisements for investment products that offer them guaranteed income. I have always been skeptical about any advertised “guarantees” and understand there is a cost to everything. This is one of the reasons we offer our second opinion service at our firm. We take a closer look at the fine print of the annuity contract, the terms of the “guarantees” as well as the associated costs to help investors understand what they are considering buying or investing in, before they sign up and lock in their decision.
Annuities can be complicated and expensive, so retirees need to be wary of some of the terms; such as you typically give up access to the money you invest so it’s not available for emergencies. If you die soon after buying, you’ll have shelled out money for a relatively few payments. And in most cases you pay significant fees that average 3-5% to buy a “product,” opposed to an on-going financial advisory relationship with fees typically averaging 1% of AUM (assets under management).
What I have learned over the years is retirees aren’t necessarily as interested in guarantees as they are to know where their income will come from to pay their bills and enjoy life. They want to generate a reliable, safe stream of income. Ultimately they want to be well informed and in control. My goal is to help them with just that.
We start by asking a few questions:
- How much income will you need in retirement to pay your monthly bills and enjoy life?
- How much income are you receiving from other sources*, such as social security, pensions, and part-time jobs. Some retirees work part-time to do something they enjoy while earning some income.
- What is the current value of your investment portfolio?
Once we determine the net expenses that you will need to cover from your investments, we can calculate your targeted withdrawal rate, or the amount of income you will need from your investment portfolio. For example, a retired couple has $45,000 in social security income and needs to draw $35,000/year from their investment portfolio valued at $1M, equivalent to a 3.5% targeted withdrawal rate per year.
Now we can project whether or not your investment portfolio’s risk-adjusted returns will fall short, meet or exceed your targeted withdrawal rate. This serves as the basis of our relationship as we work together to balance your risk tolerance with your risk capacity. More clearly stated, we determine how much risk you are comfortable accepting and balance that with your ability to withstand market volatility without jeopardizing your financial goals. As a result of this, we may need to identify ways for you to trim your budget to lower your required withdrawal rate.
We can’t offer you any guarantees but by partnering with you and keeping you well informed and in control of your financial future, you are living life on your own terms.