So, assuming a guaranteed 6% payout rate, $1 million can be placed into an SPIA to guarantee income of $5,000 per month for two lifetimes. For anyone over age 60, the amount needed to fund an immediate annuity is much less than the amount necessary to fund other types of investments using the widely recommended 4% “safe” portfolio withdrawal rate. 8 Payout rates can vary by age, length of payout, number of lives, and other factors. 7įor those looking for an alternative to a pension, the Single Premium Immediate Annuity (SPIA) is increasingly being used to mirror pensions and provide guaranteed income that either one or two individuals will not outlive. Depending on the study, some experts such as David Blanchett from Morningstar recommend 2.8% as a safe withdrawal rate for retirees “wanting a 90% probability of achieving their retirement income goal with a 30-year time horizon.” 6 However, others still recommend a maximum of 4% as a safe withdrawal rate for a portfolio. Much has been written regarding “safe” portfolio withdrawal rates. How do I make sure I don’t run out of money in retirement? Imagine the stress of being forced to withdraw money out of at-risk qualified retirement accounts when account balances decreased by 43% during the first three years and 38% or more during year nine (fortunately, RMDs were forgiven for 2009). Remember the good old days of the late 1990s when investing in the stock market seemed like much less of a risk? 4 How about the subsequent 10-year period that included three bear market corrections in 2000-2002, 2008, and 2009? 5 This lost decade period beginning in 2000 was a stressful time for many savers, and it was even worse for the many retirees facing Required Minimum Distribution (RMD) during the same time period. What if the lost decade returns when I retire? The combined $4,000 Social Security checks would still be there (as long as Social Security stays fully funded beyond 2034-2035), but the remaining $5,000 per month of income with cost-of-living adjustments would need to come from personal savings and investments. The monthly Social Security and pension checks all have cost-of-living adjustments that can help keep up with inflation.įast-forward to today’s retirement income conundrum for the same family without pension income. If a husband and wife both earned the same amount of income over the years and each collect $2,000 per month from Social Security and $2,000 per month from pension income, the remaining income need of $1,000 per month could be funded by personal savings as long as enough money was saved prior to retirement.
Let’s assume a family’s monthly income needs are $9,000 per month.
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