If you haven’t retired yet, then your primary investment objective may be growth. Why does a person invest for growth while they are working? From my experience, people invest for growth so they can walk away from employment paychecks and spend their wealth as income play-checks without having to work!
The transition from Paychecks to Play-checks in retirement is a huge shift in client mindset and investment objectives. You might use growth strategies for an investment growth objective but not for an income objective. This may be a simplistic concept, but I approach retirement income planning by seeking to generate the most income, with the least amount of money and risk. You see, retirement income is all about your lifestyle!
Don’t become Old, Sane, and Broke! You likely can handle 2 out of 3, but all three is a bad combination.
You’ve likely been convinced you should have less investment risk as you age and especially in retirement. The rationale is you don’t want to return to working or run out of money. This is a reasonable thought process. However, in this interest rate environment, how will you generate income with the portion of your portfolio that’s not in the stock market?
Low risk government bonds, money market accounts, and Certificates of Deposit may be paying 3 - 5%. If you want dividends, then you are in the stock market with stock market risk. Using annuities properly may allow for more income output from non-stock market allocation as well as lifetime income guarantees only annuities can provide.
All of us are familiar with Social Security, and most consumers and financial professionals speak positively about the program. Social Security is a very restrictive income annuity, as there is no principle for heirs to inherit. However, Social Security does what only annuities can do, which is provide guaranteed lifetime income. Annuities are the only financial instrument that can provide guarantee income for life.
Fixed or Fixed-indexed annuities offer yields likely similar to your non-stock market allocation in your portfolio. What some annuities also offer is the opportunity to receive guaranteed income for life that exceeds the yield earned. This strategy integrated with an allocation for growth, may provide more output for your portfolio. I’ll expand on this.
Most clients I listen to have their lifestyle as a higher priority than passing on a larger inheritance. Lifestyle, when working or retired, is driven byincome. Inheritance is driven by asset growth combined by spending beneath your means.
Inheritance, by definition, is money you never spent and enjoyed for yourself. It is great if your highest priority is leaving a larger inheritance, but that is rare in my experience.
Elite wealth planning requires aligning your strategies with your priorities. As a hypothetical example, if you have a bond in your portfolio with a 4% yield and you spend more than that 4% yield, then your principle goes down and could lead to becoming Old, Sane, and Broke. A fixed annuity may only have a yield of 4% but may be able to provide a 5-6% distribution that you cannot outlive.
If you have an annuity earning 2%, but distributing 5-6% to you as income, then your principle is going down, but your income is not going down throughout your lifetime even if principle is exhausted. This is leveraging your assets based on the certainty of dying. To only spend the yield of an investment, while protecting principle, is to decide you wish to have your heirs inherit the principle.
If you have not yet retired, you are likely best served with a growth strategy. Just don’t fool yourself into thinking you will live forever. Will you only spend the “scraps” yielded from your principle? Will you spend your principle, or do you prefer someone else does?
Lastly, if you create your lifestyle income using the least amount of money and risk, then you might consider this a “permission slip” to invest your remaining portfolio with substantial risk and a long-term perspective. As when you’re employed, the stock market gyrations don’t have much or any effect on your current lifestyle.
What are you doing with your portfolio allocation not in the stock market? How much yield are you expecting from that allocation?
There are many different annuities with different terms and fees. This article does not constitute advice, as the most efficient strategy for you should be customized based on your priorities.