Entries posted by Annuity Reserve

The Missing Piece in the Retirement Puzzle

Posted by Annuity Reserve on September 16, 2012

One of the most puzzling issues confronting individuals entering retirement is how to properly piece together their retirement plan. The issues that retirees must address have grown in complexity and are unlike what any other generation has previously faced. Retirees today must address longer life expectancies than previous generations, income needs in a historically low interest rate environment, and increasing volatility in world markets.

Both men and women have dramatically increased life expectancies over the last 50 years. In 1960 the average American male lived 66.6 years and the average American woman lived 73.1 years. Most men and women only had to plan for less than ten years after retirement at the social security age of 65. Due to the short period of time in retirement, many retirees could place their money exclusively in conservative interest bearing investments and spend them down in retirement. By 2010 the average American male’s life expectancy had almost increased by a full decade to 76.2 years and the average American female’s life expectancy has risen to 81.1 years. In fact if a married couple both reach the age of 65 there is a 50% chance one will live to be age 92. That means most couples entering retirement should expect the strong likelihood of 27 years in retirement or more. With the length of retirement extended, the old method of putting all of one’s money in very conservative savings and CD’s and spending down the money is no longer a viable plan as it has the risk of running out.

The crash of the world markets in 2008 brought about unprecedented action by The Federal Reserve to try to stem the downward spiral of our nation’s economy. One of the measures The Federal Reserve has taken is to attempt to lower interest rates to stimulate the economy. While this maneuver may be beneficial for the economy it is disastrous for retirees. Interest rates have been held at historically low interest rates for an extended period of time and traditional pieces in most retirees’ plans such as savings accounts, CD’s, and treasury bonds no longer produce the income needed for a sustainable retirement plan.

In an attempt to find higher paying sources of income in today’s low interest rate environment many retirees have been forced to play the dangerous game of buying more highly speculative assets as sources of income, leaving their retirement plans open to greater risk in future economic downturns. In 2008 the Dow Jones had 29 days where the value moved by 5% or more. On “Black Monday” in 1987 the Dow Jones dropped 22.61% in one day! While those saving for retirement may have time to wait out these downturns, those in retirement can’t wait as they need money on a daily basis. When saving money the path along the way doesn’t matter as long as you end up where you need to be.

In retirement the journey does matter as you become subject to sequence of return risk. Sequence of return risk means that if the first few years of returns in retirement are bad there is a greater likelihood you will run out of money. If you had invested 50% of your money in stocks and 50% in bonds starting in 1973 you would have earned an impressive average of 10.1% per year. If you had planned on withdrawing 5% per year as your portfolio grew at the 10.1% average you might be surprised to find out that you would run out of money!*

With increasing life expectancies, low interest rates, and unprecedented volatility in the world markets, an annuity may be the missing piece in your retirement puzzle. Annuities can create an income stream that you cannot outlive, while also eliminating volatility. Only through an annuity are you paid not only interest, but also mortality credits. Due to mortality credits and interest payments you may be able to receive a higher payout rate than you can with other safe holdings. Talk to an AnnuityReserve.com expert to find out if an annuity is the right fit for your retirement puzzle.

*New York Life Insurance Management LLC, 2004

*Guarantees and Safety are subject to the claims paying ability and financial soundness of the insurance company contracted with.


Posted by Annuity Reserve on August 22, 2012

As an individual enters retirement they are faced with the decision of how much of their savings and account values should they spend per year in retirement. If they spend too much, they are faced with the dire consequences of outliving their money and being forced into making drastic life changes. If they spend too little, they may not have enjoyed their golden years to their full potential. Faced with this dilemma most individuals turn to professional advice and ask the question, how much can I safely withdraw from my savings and accounts without running out of money? Unfortunately that question brings many varying opinions.

For years advisors and planners have touted the 4% rate as a rule of thumb. This rule of thumb was born out of the research done by William Bengen in the early 1990′s. Bengen’s research ultimately declared that retirees could withdraw 4.5% per year and their money would last for 30 years with a high degree of probability. In 2010 a report in the Journal of Financial Planning advocated only a paltry 1.8% withdrawal rate as safe. Only a few weeks later a report in the Retirement Management Journal suggested for some individuals 7% maybe safe. With such a widely varying mix of advice what is one to do with one of the most important financial decisions in their life, and why is there such disagreement on the amount to be taken that is safe?

The simple answer as to why financial professionals do not agree on what a safe withdrawal rate is, is because there is not a safe withdrawal rate unless you have a guarantee behind it. Even if a withdrawal rate has a 90% probability of working out, it is little consolation if you are the unlucky one out of every ten people that ends up flat broke. Even more troubling is that most assumptions on what is a safe withdrawal rate are based upon the past. Today retirees are faced with low interest rates everywhere they turn. Banks pay little to nothing on savings accounts, checking accounts, and CD’s. Bond yields are at historically low levels. These low interest rate levels will make proposed safe withdrawals rates of the past even more difficult to achieve.

There is one tried and true method of determining how much money you can spend on an annual basis. Using a SPIA (single premium immediate annuity) and placing money with an insurance company, an individual can receive a guarantee to receive a payment every month for the rest of their life. A husband and wife by using a SPIA can choose to guarantee a payment every month as long as one of them is living. A 65 year old may receive a payment as high as 7.3%* per year for life!

Don’t put your retirement paycheck at risk, talk to an expert at AnnuityReserve.com about how to create a truly safe withdrawal rate that you can not outlive.

*Sample rate is based upon data provided by New York Life Insurance Company. Actual rates may vary at time of issuance

*Guarantees and Safety are subject to the claims paying ability and financial soundness of the insurance company contracted with.

Gambling With Your Retirement

Posted by Annuity Reserve on April 27, 2012

Legislation creating the 401k plan went into effect January 1st 1980. This legislation allowed employees to have a salary reduction from their paycheck and direct deposit the funds into their 401k investment account.  Viewed as a way to reduce current taxes and supplement savings and social security for retirement the 401k plan experienced widespread adoption and popularity. Through the 1980’s and 1990’s most investors were generally happy as the U.S. stock market experienced one of the greatest bull runs ever experienced. The new demand from buyers in 401k plans helped drive the value of stocks and bonds into bubble valuations in 2000. Then the bottom fell out.  The S&P 500 fell nearly 50% over the next three years and the NASDAQ crashed 80%.  Through 2011 the S&P 500 is still struggling to return to the levels of the year 2000 and the NASDAQ is still worth less than half of its year 2000 valuation. As boomers have begun retiring through the 2000’s they’ve been wondering whatever happened to happily ever after. Is the market a casino?  Is it the best way to grow my money? Is it the best way to provide an income in retirement?

The stock market has proven a difficult arena for individuals to prepare for retirement. The daily ups and downs have given many an ulcer or two, and most investors haven’t been rewarded for the mental anguish.  Studies have indicated for the 20-year period ending in December 31, 2010, average equity (stocks) mutual fund investors have returned a paltry 3.89% compounding return. The results of the average bond fund investor have been even worse at a 1.01% compounding rate. The factors contributing to the poor performance is attributable to factors such as the fear/greed cycle causing investors to jump in and out of the market at the wrong time, and the associated fees.

While it is difficult enough for the average investor to grow their assets and prepare for retirement, distributing a sustainable stream of income in retirement has proven even more treacherous. Studies by T. Rowe Price have indicated if an individual in a 60% stock and 40% bond portfolio begins taking a 5% withdrawal rate and increases the withdrawal 3% annually to adjust for cost of living, the individual has a 68% chance of having money after 30 years. That means 32% of individuals would be broke after implementing the same strategy.  Income distribution in retirement is a trickier proposition because money needs to go out every year to pay for expenses whether or not the market is up or down.  Withdrawals during down market years exacerbate losses and the greater the loss the more difficult it is to catch back up.  If one loses 50% a 50% gain does not get you back to even.  A 50% loss must be followed by a 100% gain to get back to even.

If you’re lucky enough to grow your money in the market, is a one-third chance of running out of money in retirement a bet worth taking? Don’t gamble with your financial security.


*Guarantees and Safety are subject to the claims paying ability and financial soundness of the insurance company contracted with.

The Babe, The Great Depression, and Annuities.

Posted by Annuity Reserve on April 27, 2012

Babe Ruth is arguably the greatest major league baseball player of all time.  Babe was such a draw for the New York Yankees that the Yankees made Babe the highest paid player in baseball in 1922, at a salary of $52,000 per year. The Babe spent the early part of the roaring 20’s blowing through his prodigious salary.  Babe was well on his way to going down in history as one of the many athletes who lived lavishly but spent their retirement in bankruptcy.  The history of sport is littered with former greats losing it all such as Johnny Unitas, Scottie Pippen, Dorthy Hamill, Evander Holyfield, and most famously Mike Tyson who squandered away earnings in excess of $300,000,000.  At the urging of his business manager Babe met with future Hall of Famer, Harry Heilman, of the Detroit Tigers in October of 1923.  Harry Heilman worked in the off-season as an insurance agent for The Equitable.  Babe purchased a deferred annuity from Harry with his World Series winnings and a portion of his annual salary.  Babe continued to make additional annuity purchases through 1930.

When Babe began making his annuity purchases, he had no idea the roaring 20’s would come to a crashing halt with The Great Depression taking hold in 1929.  Babe was forced to retire from baseball during the 1935 season as he was no longer able to physically withstand the toll the game took on his body.  Once the highest paid player in baseball, Babe was now unemployed during the heart of The Great Depression.  Due to the planning Babe and Harry Heilman had done previously, Babe was able to begin receiving payments starting in 1934 of over  $17,500 a year in annuity payments.  $17,500 a year in 1934 is the inflation adjusted equivalent of $290,578.22 in today’s dollars.  While other athletes and celebrities of the time found themselves in bread lines and destitute, The Babe lived comfortably in retirement never having to worry of running out of money. The Babe was so impressed with the power of annuities in creating financial security that he directed his estate to purchase a lifetime payment annuity for his wife at his death so she would always be taken care of also.

While the Babe can’t teach any of us to hit home runs in the manner he did, he left behind a lesson that all can benefit from.  With wise planning and using the safety of annuities, one can retire with security no matter what happens in stock markets.