How to create reliable and sustainable retirement income

Doug Horn

The recent significant declines in the investment market indexes has once again raised the question of how to create reliable and sustainable retirement income. Those nearing retirement can often find themselves facing a decision they just as soon avoid. The decision, whether to be invested or not.

Whether the retirement account is $200,000 or $1.2 million, the question can be the same. Many investors feel the need to become conservative with their investments as they near the date of their retirement. This was true several decades ago. But, since today’s retiree may live into their nineties or perhaps longer, the ability to create an income that will keep pace with inflation is crucial.

To create the needed income, investors must first know what to expect. There are three stages to investing for retirement; accumulation, plateau, and consumption. Many investors go into retirement with the assumption the rate of return they have averaged while creating their investments is a realistic target for their retirement years. Unfortunately, this is generally not true. Over a ten year period or longer, the accumulator will almost always experience a higher return than someone in either of the other two stages. And due to the consistent withdrawal of funds, those in the distribution phase generally have the lowest returns. And to further reduce the retiree’s returns, those now living off of their retirement accounts often invest more conservatively as well.

If a return of eight percent was targeted, the investor could withdraw four or five percent for living expenses. This would permit the investment accounts to continue to grow when the targeted returns are met. As such, periodically the investor could increase their withdrawals. Not because they had increased the withdrawal rate, but because the same withdrawal rate was applied to a larger account value. While this sounds simple, things can become scrambled in a hurry when the investment market experiences a year like 2008 where it lost almost forty percent of its value. A five percent withdrawal rate on $200,000 would create annual income of $10,000. But, after a market correction like 2008, the income would be slashed by approximately $4,000.

But, if investors were to avoid equities during retirement, their ability to keep pace with inflation would become almost impossible. To keep pace with a three percent inflation rate, a $10,000 annual income would have to increase by more than fifty percent to $15,600 just fifteen years later. To create this level of income at the same five percent withdrawal rate would require an investment pool of $312,000. In today’s low interest rate environment, it would be next to impossible to withdraw the needed income and to grow the account value by investing in fixed income vehicles like certificates of deposit, municipals, or bonds.

Variable annuities which are offered by insurance companies may become more popular due to the features and guarantees they offer. While complex and not every licensed representative is equipped to adequately represent these products, they may have a place in providing reliable retirement income.

Due to the complexities of these products and the variety of benefits and features offered by the many carriers, it is best to work with professionals to be certain proper solutions are provided without creating unwanted outcomes. Since annuities can provide guaranteed income for the life of a couple and this income may increase over the years, using variable annuities as a piece to the retirement income puzzle can prove beneficial.

For assistance with insurance, estate planning, and investment management contact me at Quality Financial Concepts or one of the other Certified financial planners in our area. To continue a personal quest for education, you can also view our learning center on our website,

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