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 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.