I am very fortunate and grateful to have lived in a generation where I will retire with a combination of several defined benefit pensions, lifetime retiree medical benefits, Social Security and other investment savings. Unfortunately, this is becoming less common each year. Almost all future individuals will eventually have to rely solely on their savings, Social Security and Medicare. There will be no defined benefit pensions that provide lifetime income for life. There will be no retiree medical plans that cover the cost of the expenses that Medicare does not cover.
I was also was able to build a bond ladder with staggered maturities using my personal investments when interest rates were high. The interest payments and maturities provide me with a steady stream of additional retirement income. With today’s low interest rates, this strategy does not seem viable. My remaining assets will protect me from cost of living expenses as inflation returns.
So, my retirement is secure and I can rely on a stable level of income with inflation protection. But, what can new retirees do to protect themselves in the future?
As companies have stepped back from providing for retirees’ needs, individuals are left to fend for themselves. With little or no financial planning or investment training, this is a daunting, if not impossible, task. Most companies do offer a 401(k) type employee benefit plan that is an excellent tax-deferred savings vehicle. Most also provide some investment and training advice from their investment providers. But few, if any, provide sufficient education and training to meet an individual’s specific retirement needs especially during the distribution phase.
For those approaching retirement now, Karen Blumenthal wrote an excellent article in The Wall Street Journal: “Funding the Post-Pension Retirement – -The great scramble for retirement income is coming. Are you ready?” where she outlines the choices available now in today’s investment climate:
- Go long. Because running out of money would be rotten, financial planners urge us to prepare as though we all are going to live into our 90s—even though most of us probably won’t. One option is to buy longevity insurance, making a lump-sum payment now in exchange for monthly income that starts in your mid-80s and lasts as long as you do. If you die before your mid-80s, of course, you won’t receive anything. But the cost of this insurance is far cheaper than other insurance income options, especially if you buy it in your 40s or 50s.
- Insure your income in a 401(k). Annuities have long been an option for those without pensions, and they are showing up more often as investment alternatives in 401(k) plans. TIAA-CREF serves higher-education employees who traditionally lack pensions, and about two-thirds of them invest regularly in TIAA Traditional, a guaranteed fixed annuity that provides lifetime income, says Ed Moslander, the firm’s senior managing director for institutional sales and services.
- Insure your income outside of a 401(k). Individuals can buy interest-rate sensitive “income” or “immediate” annuities with a lump sum and immediately begin paying a fixed amount each month. The risk is that payments could end with the death of you or your surviving spouse, depending on the type you buy—even if you didn’t receive the benefit for very long.
- Annuities with risk: “Living benefit” annuities, which are tied to the stock market, pay out a guaranteed amount, about 5% today, and have been a more popular choice because they can also grow in value—though they can also shrink. With any insurance product, expenses and terms can vary widely, so you need to do your homework, says Dan Weinberger, vice president of behavioral finance and retirement strategy at MetLife. You also need to have confidence that the company is well-managed and stable enough to be around in your old age.
- Do it yourself. An oft-quoted rule of thumb is that you should withdraw no more than 4% of your savings in your first year of retirement and then increase that amount by the rate of inflation each year. According to computer simulations, this method greatly reduces the chance you will run out of money, even in your 90s. Some mutual-fund companies offer “payout funds” that aim to do the distributing for you, keeping money invested in a mix of stocks and bonds and sending you regular checks. But there are many “ifs” in the 4% strategy: If you stay modestly invested in the stock market and have good timing, you could scrimp in your retirement years while building a big, unspent nest egg. Conversely, lousy stock-market returns could leave you with less than you really want. Plus, says Steve Utkus, head of the Vanguard Center for Retirement Research, “taking money out of an account that is going down is very paralyzing to some people.”
Karen concludes by stating: “Ultimately, we may have to become as alert to retirement asset-allocation and withdrawal strategies as we have become at investing and accumulating. Depending on how much you save and how much you want to spend, you may find you want a mix of products and services.” I would add that you will likely find that you will want much more in your account retirement balance than you ever thought was necessary.