The Simple Rule That’s Not So Simple
I came across an article recently entitled “The simple rule that keeps income flowing during retirement “ and thought I would present an alternate solution for the retiree using a life annuity. To ensure that the retiree doesn’t run out of money over their lifespan (from age 65 to age 95), the author recommends that they should limit their annual withdrawals from their balanced portfolio to 4% inflation adjusted (means you get a 2% raise each subsequent year). If you are a portfolio manager or typically licensed for securities, your mindset might be tilted towards making the portfolio last but here is where I diverge as a financial planner specializing in retirement income planning.
Let’s look at the scenario using a life annuity and see what annuity payout rates would be. While it is not stated whether it was a male, female or couple or whether the investment was in a registered plan or not, I ran three scenarios for a single male, single female and joint couple all age 65 on August 28th, 2014 and determined what a life annuity would pay annually if it also had a 2% raise each year, so we can compare apples to apples. What did I find?
- A single male would receive just over 5.4%.
- A single female would receive just over 4.9%
- A couple would receive just over 4.2%.
So in summary, the annuity had a guaranteed payout greater than the balanced portfolio using the 4% rule and you know your income will never run out for your entire life for you or your spouse. Annuities should not be a 100% solution but should be investigated as one part of the retirement income puzzle. Educating clients on annuities is one of the items I put a priority on.
What impact would an annuity have on your retirement income cash flow? If you would like your situation analyzed or have further questions about annuities and how they might benefit your personal situation, please click here to contact me.
I am a life licenced broker for annuities from all major Canadian companies.
Cannex Quotes * used in this article are shown below:
* CANNEX specializes in gathering, compiling and redistributing comparative information about annuities in Canada and the US.
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