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Recent market swings have millions of retirees and pre-retirees seeking safe places to stash what’s left of their nest egg. Because double-digit losses can take a serious toll on retirees’ assets, the financial security many people anticipated enjoying in retirement is disappearing quickly. Some may even be contemplating indefinitely postponing retirement or re-entering the workforce to help rebuild their retirement assets.
Emily, age 66*, has amassed $500,000 of retirement savings. Following what she believed to be a sound retirement plan, she had been covering her basic living expenses through a combination of her social security, pension, and annual portfolio withdrawals of 4% ($20,000). Emily chose a 4% withdrawal rate because it was considered a relatively safe rate to provide her with the income she needed, while making sure her money lasted as long as possible.
*Case study is fictitious.
Unfortunately, because of recent economic turbulence, most equity-based investments have experienced a significant drop in value. As a result, Emily’s portfolio value decreased to $400,000. This means if Emily continues to withdraw just 4%, she will only receive $16,000 of income –$4,000 less than she had been receiving. Emily cannot comfortably cover all her basic living expenses on less income, yet she’s worried that if she continues to take the $20,000/year – which now represents 5% of her portfolio’s value -- she could deplete her portfolio prematurely and run out of money.
Where can Emily find the security she desires, coupled with the income level she needs? An alternative to her current strategy would be for Emily to purchase a Lifetime Income Annuity (LIA) 1 (LIA), which will guarantee her an annual income she can never outlive.
By using only $250,000 of her savings, Emily can buy a LIA, which will pay out approximately $22,300 per year 2 based on her age, sex, and the options she chooses. That’s more income generated from less money. In addition, since the payout is guaranteed, Emily’s retirement income is safe from future stock market swings and can never be exhausted. If inflation is a concern, Emily can speak to her agent about New York Life’s Annual Increase Option 3, which if elected, her initial income will start lower for the same premium amount, but will increase her payout by 1% to 5% annually depending on which percentage she chooses to help preserve her buying power.
Using the Lifetime Income Annuity, Emily is guaranteed to receive the income she needs every month to cover her basic expenses, plus she can decide to spend the remaining $150,000 of her savings however she chooses, or continue saving it for the future. So, no matter how the financial markets perform in the coming years, Emily can have peace of mind from knowing her lifestyle is financially secure because of the income provided by the New York Life Lifetime Income Annuity.
1 Issued by New York Life Insurance ans Annuity Corporation (a Delaware Corporation), a wholly owned subsidiary of New York life Insurance Company. Guarantees are based on the claims paying ability of the issuer.
2 This example is hypothetical and is intended for illustrative purposes only. This payout rate is based on a Single Life Lifetime Income Annuity policy for a 66-year old female, Life Only, before tax. Payout rates as of November 2008 for payouts starting November 2009.
3 The policy owner must elect the Annual Increase Option at the time of purchase and be at least 59 1/2 at the time of the first payment.
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