Generate retirement income more efficiently
Retirement is your reward for a lifetime of hard work. It’s also the time when you shift gears from the first phase of your retirement plan — asset accumulation — to the second phase — asset distribution.
This transition is a pivotal point in your personal retirement strategy, because the choices you make now will impact your long-term financial situation.
Not Too Much; Not Too Little
When it comes to determining how much savings to use as income, many retirees set a withdraw rate that seems sufficient to cover their current expenses. But, if retirees do not fully understand what level of withdrawal is most efficient and effective for reaching their goals — one of which being to not run out of money — there could be significant consequences.
The strategy of regular withdrawals is often called a systematic withdrawal plan. When designing yours, it’s important to first calculate your retirement income needs and then compare them with your actual assets. Your systematic withdrawal plan should act like a financial blueprint — a sensible guide that helps you determine how much money you can take out and for how long. This review can help you identify potential shortcomings in your income strategy, and prompt you to seek alternative solutions before they develop into more serious cash-flow problems.
Withdrawing Against $1 Million
Let’s assume you have a retirement portfolio worth $1 million. Withdrawing just %5 per year ($50,000) and upping the withdrawal 3% each year to keep pace with inflation may at first sound like a conservative strategy. But, when the numbers are crunched into a systematic withdrawal plan, we find that there is only a 90% chance of your money lasting even 20 years with this approach1. In other words, for every 100 retirees who go this route, 10 of them will run out of money. Most of us would do everything in our power to avoid being in that unfortunate group.
Turbulent Markets Erode Savings
Another serious consideration for retirees, increasingly apparent in our current economic times, is market volatility. Erratic swings can slash portfolio values without warning and gravely impact the actual dollar amount represented by your withdrawal percentage. Significant losses can be hard to recover from. A 5% annual withdrawal from a $1 million portfolio is $50k, but a 5% withdrawal from a down portfolio now worth $750,000 is just $37,500. That’s a monthly income loss of over $1,000, and an annual income loss of over $12,500, through no fault of your own. Even well diversified portfolios can suffer in volatile markets.
Protection is Top Priority
Retirees want and need to protect their savings. While no one knows how long he or she will live, it’s critical to ensure that you don’t run out of money during retirement. That’s why the New York Life Guaranteed Lifetime Income Annuity has been gaining in popularity: it’s designed to provide guaranteed income for life.
Guaranteed, Protected Income for Life
Take that same $1 million portfolio. From it, $881,417 can be used to purchase a Guaranteed Lifetime Income Annuity, which will guarantee $50,000 per year of income2. With the Annual Increase Option, the payout increases 3% each year to counter inflation and preserve buying power. The projections and adjustments are eliminated from your systematic withdrawal plan because whether the market is up or down, you still get your guaranteed income each and every year of your life, even if you live to 80, 95 or longer! Best of all, you would still have the remaining $118,583 of your portfolio left to spend as you choose.
The New York Life Guaranteed Lifetime Income Annuity offers a more efficient way to generate lifetime retirement income, with approximately 12% fewer assets actually employed to create a guaranteed, life-long income stream. And in case of premature death, the New York Life Lifetime Guaranteed Income Annuity has a Cash Refund option, which will provide your beneficiaries with the difference between the initial paid premium and whatever income you had received.
If you are interested in inflation-adjusted income that can never be outlived and is invulnerable to market volatility, a New York Life Guaranteed Lifetime Income Annuity may be for you. You can enjoy greater peace of mind knowing your income is guaranteed for life, no matter how long your retirement lasts.
1 Source: Internal New York Life analysis. Hypothetical example of assets held in an untaxed account of $1,000,000. Systematic withdrawal plan rates, and associated portfolio duration based on hypothetical allocation between equities and bonds; 125 basis point annual fund management expense. This example is based on a Monte Carlo model simulation of 1,000 scenarios each of correlated equity and bond returns using an economic scenario generator. Correlations estimated using historical monthly S & P 500 Index and Barclay's U.S. Aggregate Index returns over 20 years (1989-2009). Equity and bond returns are assumed to be normally distributed. Each withdrawal rate is adjusted annually for 3% inflation. This model is intended to be an indicator of potential returns at various confidence levels and is not designed to be a forecast of future investment performance. Investors can not invest directly in an index.
The value at the 95th percentile represents the amount at which 90 percent of the simulations had at least that value; the value at the 10th percentile represents the amount at which only 5 percent of the simulations had at least that value.
A Monte Carlo simulation analyzes probabilities and seeks to identify the number of years your profile will last, given your financial profile. The simulation is hypothetical, does not reflect past performance, and is not a forecast of future results. Simulation results may vary with each use and over time. Each client’s results depend on individual factors which a simulation does not account for, such as how investment decisions are implemented in reality and the costs of investing. A simulation may not capture how asset classes fall in and out of favor over time. These factors can influence a client’s results materially.
2This example is based on New York Life Guaranteed Lifetime Income Annuity for a female, 75 year-old, single life with Cash Refund Payout Option and a 3% Annual Increase Option, rates as of 7/9/2012. The New York Life Guaranteed Lifetime Income Annuity is issued by New York Life Insurance and Annuity Corporation, a wholly owned subsidiary of New York Life Insurance Company. Guarantees are backed by the claims paying ability of the issuer.
For most jurisdictions, the policy form number for the New York Life Guaranteed Lifetime Income Annuity is ICC11-P102 (it may be 211-P100) and state variations may apply.