You know what they say about the best laid out plans, well, what’s going on in the financial world this year, that’s what happened with countless retirement plans.
For example, let’s look at an imaginary retiree who so far thought he was all set. Our sample investor stopped formalizing his plan for retirement income until he began taking Social Security at age 70 and made withdrawals from his rollover IRA. It was December of 2021. Inflation seemed appropriately under control; The markets were performing well; And with 50% of his $2 million portfolio invested in bonds, it was fairly conservative.
Social Security and a pension totaling $60,000 per year helped her meet her initial income goal of $150,000. The balance of $90,000 was coming from his $2 million retirement savings.
Even after withdrawing part of her personal savings to target her income, she was leaving a solid legacy assuming historical market returns. He used a traditional income planning approach, relying only on his investments. She was fine and felt reasonably safe.
As with many like him, including financial pundits, he did not anticipate market volatility for what happened next.
What happened during the first 6 months of 2022?
Sometimes market volatility results in you having to cut back on your spending during unexpected rocky patches. The same can happen to you after retirement if your planning doesn’t account for real life prospects. So, here’s what happened in 2022 so far.
- First, Effect of inflation, growing by over 8%. recently Survey found that in response to high inflation, 35% of those planning for retirement are cutting back on social activities, and 28% are spending less on travel to maintain or increase their retirement contributions. Our investor was not ready to make a radical change in his lifestyle.
- Second, the share of its investment portfolio in growth stocks fell by more than 30% since early 2022, due to market downturns. (The share in high-dividend stocks was up for a while, but fell more than 8%.)
- Third, the value of her fixed income portfolio fell about 14%, reducing both her rollover IRA and personal savings accounts. She was definitely not ready for it.
- Fourth, the combined effect was that the savings she was using to reduce income (the portion of the rollover IRA plus personal savings) were down more than 20%. His shackles did not protect him.
What did these events do to her plan for retirement income?
Many individuals get shy at such times and will not even discuss what the long term consequences of their plan could be, but our investor wanted to completely update his plan for the current market conditions. Here’s what he discovered.
As he looked at inflation, our investor figured his living expenses were $10,000 per year, raising his income target to $160,000. (She believed the inflation rate could go down further.) Her Social Security and pension would still contribute $60,000 a year (good for her), so her retirement goal from savings is now $100,000.
With her retirement savings down by $1.6 million, using the previous strategy would only produce $74,000 per year as her starting income — $26,000 less than her new budget. If she believed in a lower rate of inflation going forward, say 1%, her plan income would be $82,000 — still $18,000 less. Reducing his excess savings to make up for this shortfall reduces his legacy and increases the risk of running out of money.
Let’s turn back the clock and see how a Go2Income plan would have performed instead.
What you can get with Go2Income plan
The main differences between Go2Income and Traditional Income plan are:
- Annuity payments as a source of income.
- Overall a low allocation to stocks but with a high allocation to high dividend stocks.
- An algorithm that integrates all sources of income.
So let’s see how this plan works.
Her initial income from savings would have been over $100,000 in December 2021, giving her a cushion of $10,000 against her original $90,000 from savings. And because of annuity payments in the mix, more income will be safer and less taxable.
With the separate allocation for shares under the Go2Income plan at the end of June 2022, the value of his invested savings would have fallen to just $245,000, versus $400,000 under a traditional plan. Her income has fallen under an updated plan backed by reduced savings, but only to $91,000.
She’s willing to assume a lower inflation rate of 1% to meet her new goal of $100,000 from savings, assuming she can adjust gradually, and has a new income of $100,000 – bringing her total to over $160,000 .
Of course, she can’t go back in time.
Converting your traditional plan to Go2Income plan?
Kicking herself about not adopting Go2Income earlier, she doesn’t want to downplay her problems. So, what would a new Go2Income plan look like, starting at $1.6 million over the original plan? He was pleasantly surprised to find that he was still fine. Reasons mentioned above include, plus one more – annuities are now even more attractive because increase in interest rates,
Without any change in assumptions, his income under a new Go2Income plan would be $88,000 as of June 30, 2022, even with savings of less than $1.6 million; If she lowers her inflation expectation to 1% per year, her income goes back to $97,000. Here is a picture of his new plan.
Note: DIA means Dividend, Interest and Annuity Payment; SPIA stands for Single Premium Immediate Annuity.
When considering changes to his planning method, he should ensure that he considers the tax consequences of such a move where possible. Of course, she can stick with her existing investment advisors or manage the money herself if she prefers.
It was a very tough six months – and it may continue. She is grateful that she was able to make her retirement plans more secure.
However, the ever thoughtful investor asked if annuity rates could rise further in the future. However, it is highly likely that there are risks of delays, low cash flow, high risk exposure and poor tax treatment. Smart compromise may be to implement immediate annuity payments now and delay future annuities payment,
Well, he shouldn’t scold himself too much for not adopting the Go2Income plan in the first place. While there was an economic loss from the delay, the real loss was the loss of sleep. Like we said, Go2Income is built to deliver a more secure retirement.
If you have a similar situation then we can help you. Go to Go2Income for one Complimentary Personal Plan that delivers both high starting income and growing lifetime incomeWith all Long term savings.
President, Golden Retirement Advisors Inc.