The Dirty Little Secret of Retirement Planning

What is the most difficult challenge you will encounter in retirement? It is the risk of running out of money and not having enough income to live on. Unfortunately, this is not an isolated risk. 

After working for decades so you could enjoy decades of not working, what is the first thing that happens the very day you retire? Your income stops. After a career receiving a check every two weeks, you suddenly need to replace that income for your retirement years, no matter how many years that may be. 

The truth is you need a plan to meet your income needs in retirement. Fortunately, there is no shortage of banks, investment firms and insurance companies, along with a bevy of financial planners eager and ready to help you create a retirement income plan.  

A Dirty Little Secret 

Unfortunately, there is a dirty little secret when it comes to retirement planning. The secret is that even the most forward-looking retirement plans don’t fully protect against the risk of running out of money during retirement. Banks, investment firms and financial planners all promote their ability to create a sophisticated, “worry-free” retirement plan.  

These plans are designed to produce retirement income by systematically “decumulating” the assets that the retiree had accumulated during working years. Sometimes, there is even the insinuation that these plans will not only provide retirement income, but that the assets may actually increase in value over the years.

The vast majority of these planners and investment advisors are well-intentioned and do their best to create plans that will provide a comfortable retirement. But they rarely bring up the biggest risk that retirees face: What happens if the plan does not work as anticipated and the retiree runs out of money during retirement? The reason banks, investment firms and financial planners seldom mention the risk of running out of money is because they lack the tools to guarantee that this hazard can be eliminated. 

Nothing is more nightmarish than running out of money in retirement, because when it happens, there are so few options available to rectify the situation. Can you imagine how it would be to retire at 62, relying on a seemingly well-designed plan, only to discover at age 75 that your plan has run out of money? What would be your options? Could you get back into the workforce? Become an Uber driver? How would you feel about becoming a burden on family or having to depend on charity simply to survive?

Fortunately, it is possible to design a retirement plan that can meet your income needs and, at the same time, insure against the risk of that income stopping before your heart does. No one product or approach will work on its own to achieve this objective, but a multifaceted plan is the best way to meet your retirement needs and protect against that risk. 

Retirement Income Guaranteed To Last As Long As You Do

Think of your retirement plan as a three-legged stool. One leg is a pool of money available for short-term needs or unexpected expenses. Banks are best at fulfilling this role. A second leg is a cache of funds available for investment. Investment firms do this for a living. The final leg of your retirement stool is a guaranteed floor of income that will last as long as you live. Life income annuities offered by an insurance company can fill this role.

Because it is easier to adjust your standard of living in retirement to what you know your income will be, rather than what you hope it will be, a good place to start with your retirement plan is with a base of guaranteed income. 

How Much Income Will You Need?

Start by honestly determining the absolute minimum amount of monthly income you will need in retirement. After deducting the amount Social Security and what any other pension plan will pay, you know how much additional income will be needed to protect against the risk of running out of money. This is where a life income annuity, which carries a guarantee of its performance, comes in. An annuity is an agreement between you and an insurance company in which the company accepts and invests a specified amount of funds and later issues you a guaranteed fixed stream of income.

Annuities can be a good option for a retirement plan seeking income, but not just any annuity will do. For a variety of reasons, too complicated to detail in this article, insurance companies offer more annuity options than a Chinese buffet. 

When it comes to using an annuity as the base of your retirement plan, ignore the myriad options offered by insurance companies (while some of these options may be beneficial, their primary purpose is to increase fees and profits for the insurance company). Instead, ask just one question: “How much income will the annuity guarantee to provide during my retirement, no matter how long I may live?” (The simplicity of this question will also make it easier for you to compare different annuities.)

Once you have ascertained the amount of your accumulated assets that would be required to produce the guaranteed bare-minimum income needed in retirement, you can then use the balance to explore other options — such as bank plans and investments — to complete your retirement plan, without the fear of running out of money.

That's the best plan for a safe, secure and enjoyable long retirement. 

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Bob MacDonald -- Former CEO of ITT Life, founder of LifeUSA, retired chairman and CEO of Allianz Life of North America; author of numerous books on management, business and leadership. bobmac5201@gmail.com