Retirement Income Strategy – Case Study

The case study you will read below is just one example of the hundreds of people I have worked with.  Their situation is unique to them and although you may find similarities between their situation and yours please don’t take the recommendations we made as recommendations for your situation. Every investor is unique and requires a personalized strategy for their particular situation.  My purpose in sharing this is to hopefully convey that many tools are often used in the accumulation phase of life, but turning ones savings into income for, hopefully, the rest of your life can require different tools and strategies.

We meet with people who come from a wide variety of backgrounds, different careers, and various goals for their life and differing amounts of money to help pursue those goals.  The one thing we hear from almost everyone is this; please help me set up a strategy to spend my retirement dollars in an appropriate manner so I don’t outlive my money.  In a nutshell, what they are saying is “don’t let me go broke before I pass away”.  There are numerous studies and surveys out there that say the primary concern amongst retired people is outliving their assets.  This is a very real fear for many.  This can cause a lot of stress and anxiety during a time when you should be relaxing and having fun.  With a proper retirement income strategy, we can hopefully turn that stress and anxiety into strength and comfort.  This is one of the things we enjoy doing the most.  Here is a real life example of how we did this for one family.

When I first met with this couple, the husband was 59 and his wife was 58.  I will call them John and Kitty (not their real names) and they both wanted to retire in the next 12 months.  They had a sizable nest egg but it was scattered around in a lot of different places.  John had money in a few different retirement accounts that were at various banks invested in Certificates of Deposit (CDs), money held in his employers retirement plan invested in various bond investments, more CDs not held in retirement plans, a few savings accounts and some collectibles, for example gold and silver.  Kitty had money in a couple different retirement accounts invested in stock and bond investment options and a large percentage of the money in her employers retirement plan was invested very heavily in her company stock and other investments.  When I asked them what their plan was for their assets, they stated they always thought they would move everything to CDs.  I believe this was their plan since they were most comfortable and knowledgeable with how CDs worked and liked the interest they had been earning on their existing, older CDs.

Many times, through the course of investigating a client’s current situation and investment strategy, we are able to spotlight some potential flaws or roadblocks.  Often times these potential roadblocks are based on either outdated market information or investor emotions.  For John and Kitty it was a combination. We did some simple math and tallied up all their investments and savings and determined if, hypothetically, they could find a CD that would yield them 5% per year this would, theoretically meet their income needs in the first couple of years and would allow them not to touch their principal at all.  Unfortunately, the current reality of CD rates are such that John and Kitty will be hard pressed to find anything yielding above 1%, leaving John and Kitty with a theoretical 4% shortfall.  They shared with me they never really thought what they would do if CD’s weren’t earning in the neighborhood of 5%.  They had been saving just enough money to make retirement a reality for them using that 5% number.

Unfortunately, they never anticipated lower rates and as I talked with them further they never really considered the rising costs of goods and services as time went on.  They failed to realize they may possibly need more than 5% interest per year to pay for inflationary increases in things like food, gas, property taxes, utilities and health care.  Thankfully, they had a nice nest egg and we looked at a variety of options to see how close we could help them get to their income goal.  In the end, their new retirement income strategy had a lot of moving parts, not just buy a CD every year or two and then buy another one when it matured.  In an effort to meet their needs for retirement but still keeping in mind their risk tolerance, time horizon and general suitability, our recommendations for their new strategy involved:

  • Choosing a different social security timing strategy, in order to help maximize income in the later years.
  • Spending down some of their existing cash leaving the other assets to potentially grow at a conservative rate.
  • Pushing back retirement just one extra year (which we were really hoping to avoid but that extra year of saving money and not spending their assets made a big difference in their retirement income projections).
  • We recommended that Kitty sell her shares in her company stock as that investment no longer met John and Kitty’s current risk tolerance. Also, we felt the money should be invested in in something that was more in line with their goals and objectives.
  • Putting some money into a joint fixed annuity with an optional living benefit, for an additional cost, that carried a guarantee to provide income of a set amount per year, every year, as long as one of them was alive. They still have control of the assets in case things changed and they needed flexibility.

We explored various types of fixed annuities that allowed some growth potential but had that all important guaranteed income for life provision as well (either via annuitization or the guaranteed annual income provided by the optional living benefit rider).  We recommended using a fixed annuity with a living benefit rider.  This helped secure a place for growth of principal long term, while also providing, through the rider, certainty that there would be a minimum amount of income at some point in time.

In the end, by recommending a variety of changes to their savings and investment line up and working for one more year, they were able to retire and perhaps more importantly, they have been enjoying retirement ever sense.  In developing their retirement income strategy considerations were made to account for the rising costs of goods and services.  We accounted for one or both of them living well into their 90’s.  Lastly, we helped make sure when they both pass away, their wishes to leave a legacy to their children and grandchildren can be fulfilled.

Over the years the more and more of these strategies that we’ve developed, we have learned many people approach retirement as having a certain amount of money set aside and while that is very, very important, there is a lot more that goes in to setting up a retirement income strategy.  The strategy should account for things like longevity, taxes, the rising cost of goods and services, when to take your social security income and your wishes for what happens to your money should you be taken from us.  We hope this one real life example gives you a glimpse into some of the aspects of setting up a retirement income strategy and may help provide you with some considerations on your journey.

Article Written By Larry Tate

This is a hypothetical example for illustrative purposes only. It is not indicative of any particular investment or guarantee of future performance.  Investments will fluctuate and may be worth more or less than originally invested.  Past performance is not indicative of future results
Financial Advisors do not provide tax or legal advice and this should not be considered as such. Please consult a tax or legal professional for advice regarding your specific situation.
An annuity is a long-term, tax deferred investment vehicle designed for retirement.  Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59 ½, may be subject to a 10% federal tax penalty.  If the annuity will fund an IRA or other tax qualified plan, the tax-deferral feature offers no additional value.  Not FDIC/NCUA insured. Not bank guaranteed.  Not insured by any Federal Government Agency.  There are charges and expenses associated with annuities, such as deferred sales charges for early withdrawals.  Living benefit riders and agreements are available for an additional cost and are subject to fees and restrictions.
All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.
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