Sustainable Retirement Income Strategies

Racine Journal Times / To Your Wealth
September 2010
Justus Morgan, CFP^®

Which could last longer, you or your money? Once you’ve done a good job of setting aside part of your paycheck to save for your financial independence, you can reap some benefits from your diligence by converting your retirement savings into sustainable retirement income. Ways to do that include immediate annuities, making gradual withdrawals from your portfolio based on total return or combining the two strategies.

In the past we’ve written about the inappropriate use of deferred annuities which ruffled a few feathers in the brokerage and insurance communities. Another type of annuity is called an immediate annuity which represents a stream of lifetime income from an insurance company in exchange for a lump sum of money. While the intricacies of immediate annuities are beyond the scope of this column, they are worth exploring in a world where fewer companies offer traditional pension plans providing a monthly benefit for life.

Another approach to creating sustainable retirement income is gradually withdrawing money from your investments with the goal of not drawing too much that would deplete your money earlier than expected. Significant research has been generated exploring sustainable withdrawal rates based on a range of factors including life expectancy, investment rates of returns and different withdrawal rates. Based on these factors plus a host of others, withdrawing 4-5 percent each year typically represents a sustainable amount. While this rate is not applicable to everyone, the research certainly doesn’t support rates greater than 10 percent for periods exceeding ten years. Furthermore, if someone is only withdrawing 1-2 percent of their portfolio each year, all but the most conservative investor could afford to withdraw more.

What I find most interesting about this research is during several recent new client interviews we learned they were withdrawing more than twice the sustainable rate without recognizing the serious risk of running out of money. What was most galling was they were working with a financial “advisor” who never mentioned this risk. Unfortunately, most advisors continue to work in an environment where they are not legally required to act in their client’s best interest.

A third and increasingly common option is a combination of the two. Creating a guaranteed income stream to cover the basic level of expenses plus periodic withdrawals from the remaining portfolio can capture the best of both worlds. You receive the benefit of receiving income no matter how long you live with the ability to leave whatever remains in the portfolio to heirs or important causes.

If you are in the income stage, do you know what sustainable retirement income means for your portfolio? If not, don’t assume your advisor will communicate this fundamental principle of investing. To access additional resources relating to sustainable retirement income strategies, visit http://www.toyourwealth.com/retirementincome.

Justus Morgan is a fee-only financial planner with Financial Service Group, Inc., a registered investment advisory firm at 4812 Northwestern Ave., on the Web http://www.toyourwealth.com.