A Strategy for Optimizing Your Retirement Income

Walter Young

By Walter Young | March 14, 2018

“Save for retirement.” We’ve all heard the message of how important it is to save for retirement. But for all the talk about socking money away, there’s seldom any discussion of how to use that money in retirement so that it can last your entire life. With today’s longer lifespans, you could live well over 30 years in retirement. How well do you know how retirement income really works? Will the savings that took you 30 years to build up disappear?

Previous generations had pensions they could rely on that paid them a set amount of money monthly for their entire life. They never had to worry about outliving their retirement savings income. But pensions have mostly gone the way of the horse-drawn carriage and — with the advent of 401(k) plans, IRAs and other qualified retirement plans – the majority of people are now fully responsible for funding their own retirements. Running out of money has become a very real fear for some people.

Is there a way that people can manage to withdraw from their retirement plans and experience a sense of lifelong income security? Yes, and this strategy is built around the use of both payout annuities and life insurance — two financial products that are tailored for longevity of life. More on this in a second.

To some degree, retirement means transitioning from actively earning a living through work, to passively living off of what they’ve saved over the years while they were working. Hopefully, they’ve saved more than they owe, so their “balance sheet” gives them assets they can draw on for the rest of their lives.

But, there are three problems with this:

  • No one is really sure how long they will live, so it can be difficult to gauge how much money can be safely drawn out of a retirement account each month to live on. If, for example, you take too much over time, you risk outliving your money when you need it the most. On the other hand, if you utilize too little, you risk cheating yourself out of the comfortable lifestyle you’ve worked so hard for and earned.
  • Your retirement account will probably generate less money than you expect. In this era of low interest rates, the money you’ve saved may not generate as much income as it might have in years past.
  • You can’t spend a balance sheet. You can’t go to the grocery store, show them the balance on your 401(k) statement, and walk out with a gallon of milk. You need cash for that.

We all need a way to turn that balance sheet into a source of predictable cash flow that can allow us to safely maintain a standard of living without fear of running out, and without shortchanging ourselves of enjoyable life experiences in our golden years.

You may have now guessed that predictability is fundamental to what I am suggesting. Our instinctive reaction to uncertainty may be to pull back, pause, and play things conservatively. Because people don’t know how long they will live, they may end up spending as little money as they possibly can, “just in case.” However, speaking from experience, the minute I bring predictability to a client’s financial situation, it unlocks an entirely new experience, allowing them to spend more while being responsible for their retirement needs. This is the difference-maker that could allow them to visit their grandchildren versus sending them a Christmas card.

While it is very hard to predict when any one particular person is going to die, if we take that person and put them into a pool of 10,000 or 100,000 people, then we can start making predictions about how many of those people are likely to die in any particular year. This is how life insurance and annuities work, by spreading out the risk of any one person dying (for life insurance) or living (for annuities) among a much larger pool of people. For example, I can purchase an annuity (specifically, a Single Premium Immediate Annuity, or SPIA) and choose a life-only payout option which factors in as if I was only going to live to an average life expectancy. Yet, even if I live to be 100, I will still receive the same payout amount. Insurance companies are able to do this because they spread the risk of some clients outliving their money among the pool of clients participating in their annuity products, which can provide predictable recurring payments for me over my lifetime. The downside to choosing the life-only payout option on a SPIA contract is that the payments are only for my lifetime and when I die, that money is gone. Fortunately, there are a variety of payout options — including a guaranteed return of premium, income payment for a specific number of years, single or joint lifetime options — that can offset that risk, which can continue to pay out to my loved ones even after my death.

While the primary reason for buying life insurance is to provide critical death benefit protection for your family, business, and wealth, it can also serve as the center of a sound financial plan. For instance, the combination of permanent life insurance and an annuity can work together to establish a lifetime income stream because both, by nature, are designed for longevity. An example of this is streamlining the purchase of a permanent life insurance policy with a SPIA. A SPIA can be a convenient way for pre-funding a life insurance policy, with guaranteed annuity payments designed to match illustrated life insurance premiums. Using a SPIA to pay premiums on a life insurance policy allows the client to submit a lump sum to make future premium payments, while simultaneously helping to meet protection, wealth transfer, or supplemental income goals.

Owning both types of products, annuities and permanent life insurance together, may help replace the security of a pension and strengthen your financial solutions in retirement.* Annuities can create a predictable life-long income and permanent life insurance can provide the protection of a safety net for your loved ones, business priorities, and overall way of life. Certain types of permanent life insurance can also provide cash value accumulation, which you have access to through loans or withdrawals, and may offer a tax-advantaged way to supplement retirement income or pay for unexpected expenses.

The key to utilizing this strategy is to have it in place before you retire. An adviser can help you build a plan centered on life insurance products that can help unlock life’s possibilities. And on that note, I’d like to end my post with a quote from Alexander Graham Bell, “Before anything else, preparation is the key to success.”

* Some restrictions may apply.

Permanent life insurance policies are subject to certain eligibility requirements and/or restrictions, and may not be right for everyone, but it’s something to consider as you contemplate your future. A trusted adviser can help you determine if life insurance can help with your financial plan. It’s also smart to speak with someone before withdrawing or borrowing against cash value, since accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans and other policy withdrawals may be taxable under certain circumstances.

All guarantees are based on the claims paying ability of the issuer.

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