For example, let’s take a look at a hypothetical retiree who, until recently, thought she was okay. Our sample investor postponed formalizing her retirement income plan until she started taking Social Security at age 70 and made withdrawals from the rollover IRA. It was December 2021. Inflation appeared to be reasonably under control; the markets were doing well; and with 50% of his $ 2 million portfolio invested in bonds he was rather cautious.
Social Security and a pension totaling $ 60,000 per year helped her reach her initial income goal of $ 150,000. The $ 90,000 balance came from his $ 2 million retirement savings.
Even after having had to tap into some of his personal savings to reach his income goal, he was also leaving a solid legacy, assuming historical market returns. He used a traditional income planning approach based solely on his investments. She was fine and felt reasonably safe.
As with many like her, including financial experts, she didn’t anticipate market rotations for anything like what would happen next.
What happened in the first 6 months of 2022?
Sometimes the consequence of market volatility is that you simply need to reduce your spending during unforeseen rocky areas. The same could happen to you after retirement if your plan doesn’t take real-life possibilities into account. So here’s what has happened so far in 2022.
- First, inflation hit, climbing more than 8%. A recent survey found that in response to rising inflation, 35% of people planning retirement are reducing social activities and 28% are spending less on travel in order to maintain or increase pension contributions. Our investor was not ready to make radical changes to her lifestyle.
- Second, due to market declines, the share of its investment portfolios in growth stocks has fallen by more than 30% since the start of 2022. (The share in high dividend stocks has held up for a while, but ended up dropping by more than 8%).
- Third, the value of his fixed income portfolio fell by about 14%, reducing both the rollover IRA and personal savings accounts. She certainly wasn’t prepared for that.
- Fourth, the combined effect was that the savings it was using to reduce income (rollover IRA plus part of personal savings) had dropped by more than 20%. Her bonds hadn’t protected her.
What have these developments done to your retirement income plan?
Many people get shy at times like these and don’t even discuss what the long-term results could do to their plan, but our investor wanted to completely upgrade her plan to current market conditions. Here’s what she found out.
While watching inflation, our investor calculated that his living expenses had increased by $ 10,000 per year, bringing his income target to $ 160,000. (He believed there might be a lower inflation rate in the future.) His social security and retirement will still be contributing $ 60,000 a year (good for that), so his retirement goal from savings is now. $ 100,000.
With his retirement savings under $ 1.6 million, using the previous strategy will only produce $ 74,000 a year as starting income – $ 26,000 less than his new budget. If he believes in a lower inflation rate in the future, say 1%, his plan income would be $ 82,000, still $ 18,000 short. Drawing more of his savings to make up for this shortage reduces his legacy and even increases the risk of running out of money.
Let’s go back in time and see how a Go2Income plan would have gone instead.
What you can get from a Go2Income plan
The main differences between Go2Income and traditional income planning are:
- Annuities as a source of income.
- Lower allocation to stocks in general, but with a higher allocation to high dividend stocks.
- An algorithm that integrates all sources of income.
So, let’s see how this plan would work.
Her initial savings income in December 2021 would have been over $ 100,000, giving her a $ 10,000 cushion against her original $ 90,000 savings. And because of the annuity payments in the mix, more income would be safe and less would be taxable.
At the end of June 2022 with the different allocation to shares under the Go2Income plan, the value of his invested savings would have fallen by only $ 245,000, compared to $ 400,000 for a traditional plan. His income with an upgraded plan supported by the lower savings fell, but only to $ 91,000.
To reach her new goal of $ 100,000 from savings, she is willing to assume a 1% lower inflation rate, imagining that she can gradually adjust and her new income is $ 100,000, bringing the total back above $ 160,000.
Obviously it cannot go back in time.
Convert your traditional plan into a Go2Income plan?
Even if he kicks himself for not adopting Go2Income earlier, he doesn’t want to aggravate his problems. So what would a new Go2Income plan look like starting at $ 1.6 million of the original plan? She was pleasantly surprised to find that she would still be fine. The reasons why they include the above, plus one more: Annuities are even more attractive now due to a rise in interest rates.
Without any change in the assumptions, his income under a new Go2Income plan as of June 30, 2022 would be $ 88,000, even from savings of less than $ 1.6 million; if he lowers his inflation expectation to 1% per year, his income returns to $ 97,000. Here is a photo of his new plan.
Note: DIA stands for dividends, interest and annuity payments; SPIA stands for immediate single premium annuity.
When considering making a change to its planning method, you should make sure you consider, where possible, the tax consequences of such a move. Of course, she can stay with her current investment advisors or manage the money on her own if she prefers.
It has been a very difficult six months and it could continue. She is grateful that she can make her retirement plans safer.
Still the thoughtful investor, however, asked if annuity rates could rise further in the future. Although it is highly likely that there is a risk of delay, lower cash flow, higher risk exposure and worse tax treatment. The smart trade-off could be to implement immediate annuity payments early and delay future annuity payments.
By the way, he shouldn’t blame himself too much for not adopting a Go2Income plan earlier. While there was an economic loss from delaying, the real loss was a loss of sleep. As we said, Go2Income is designed to offer a more secure retirement.
We can help you if you have a similar situation. Visit Go2Income for a free custom plan which offers both a high starting income It is growing lifetime incomeas well as long-term savings.
President, Golden Retirement Advisors Inc.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income they cannot have survived. He learns more at Go2income.com, where consumers can explore all kinds of annuity options, anonymously and for free.