Unfortunately many Baby Boomers are sadly ill prepared for retirement. According to a study by the Employee Benefit Research Institute (EBRI) two-thirds of Americans believe they will have the same lifestyle in retirement as they do now, even though less than 42% have ever bothered to calculate their retirement needs.
Based on numerous statistics I have seen over the years, it wouldn't surprise me if nearly 50% of Boomers run out of money in retirement. The U.S. Department of Commerce reports the average savings rate is now close to -1.7%, and the average savings for retirement is a disappointing $50,000. To compound the situation, boomers will have a longer retirement than any other generation, lasting as long as 30 years. Some people might end up being retired longer than they actually worked.
These statistics are not prejudice to any one level of society. According to Price and Associates, 80% of top executives who are making between $500,000 and a million dollars a year in income (not net worth!) are worried about running out of money in retirement.
Retirees who run out of money only have few alternatives, none of which are pleasant. They can go back to work (if they are physically able and someone will hire them), decrease spending dramatically or find someone else to depend on. “Hi son, we’re home.”
The Perils
From my years of experience I have seen three consistent reason for clients running out of money. The first reason is simple – they don’t have enough money saved. People underestimate how much they need to save for retirement or procrastinate and start to late. The bottom line is that their nest egg is hardly large enough to support their future lifestyle.
Another reason retirees run out of money is because they invest emotionally rather than logically, yielding poor investment results. Dr. Daniel Kahneman, a founding father in the field of behavior economics and the first psychologist to win the Nobel Prize in Economics for his study on human judgment and decision-making in economics, concluded: “When investors are faced with uncertainty, they tend to make decision based on their subjective experiences and emotions, not on logic or objective reality.” As a result, they often make exactly the wrong decision for their situation.
The third reason can be blamed on aggressive positioning in the stock market at the wrong time. While I am a big proponent of investing in the stock market it can pose risk to retirees if they have their entire savings allocated to aggressively when a market correction hits. In 2001 there were many over-optimistic investors that allowed greed to govern their investment decisions and when the correction hit their account value dropped and their withdrawals had to be reduced. Less income meant a change in lifestyle.
Potential Solution
There is a great product that could help you have a guaranteed income in retirement and allow you to have equities in your portfolio. Unfortunately, it is also a product that has received unwarranted bad press and misunderstandings.
The product I am speaking of is called a variable annuity with a guaranteed income rider. There are a number of reasons why you should consider this specific type of variable annuity. Here are three:
- You know the worst-case scenario the day you sign the paperwork. That means there are no surprises.
- It takes the fear out of the marketplace. You will sleep better knowing you have a safety net to your portfolio so you can invest in equities, get the upside-market upside, and have income protection for the downside.
Here is a hypothetical scenario: The husband of an older couple retired, and shortly thereafter, the market tanked and cut their retirement savings in half. This is the worst possible thing that could happen to any retiree, because it is unlikely the person will have enough time to make it back. The agitated couple asked the financial advisor to referee a serious fight.
The husband wanted to put all the money into equities. His reasoning? It was the only way to get the nest egg back to acceptable levels. The wife was insisting on a CD. She couldn't take the stress of being in equities and taking further losses. The financial advisor had a great suggestion, one that addressed both of their concerns: a variable annuity with a living benefit rider that would guarantee a certain income in retirement. It met both their needs. The financial advisor was later contacted and the client thanked him for saving their marriage. They were so angry and polarized over this issue, they had been ready to divorce before he provided a solution that pleased both of them.
- It is one of the few investments that literally has certain guarantees. There are contractual guarantees, guarantees that are very important to clients.
Is this the perfect investment for everyone? No, of course not. It is a complicated product and not right for everyone. If you are young and will likely need the funds before age 59 ½ this is not a proper investment. It is also not appropriate if you have no interest in insuring your portfolio.
If you think you are a candidate, give us a call. This investment, more than others, should be reviewed carefully. There are a lot of moving parts and it can be easily misunderstood. We will take the time to explain the details and determine if it is right for you.
A variable product is a contract between you and an insurance company. A variable annuity is part insurance policy and part security investment, typically mutual funds. A variable insurance policy invests cash values in securities accounts held separately from the assets of the insurance company. The value of variable products will vary depending on the value of the underlying securities. There are cost and fees for each available benefit. Please read the prospectus carefully before investing.
Personal
The Colgan family continues to do well. Below are some pictures of me and Kathy, Christopher and Emily and me at the drag strip. I ran the quarter mile in 12.4 seconds and ended up being the second fastest street car. Not bad for an occasional amateur. It was a lot of fun.
