As I look at my life, I realize how many things I need to have insured just to live in the United States. If you currently own a house or rent from somebody, you need to have renter’s insurance or home insurance. If you drove your car to work today, then you need to have car insurance. Lastly, if you have young children and want to make sure they are taken care of financially if you pass away, then you probably have life insurance on you and your spouse. We rely on insurance carriers to provide a financial benefit if we ever need to make a claim. If we need insurance on all these parts of our lives, then why are we not putting insurance on our retirement income streams?
The foundation of our parents and grandparents’ retirement model was built on the income provided by social security and pension plans. The income stream was protected and guaranteed, while the risk was put on the employer and government to deliver on their promise. All our parents had savings accounts which portrayed the message of growing your assets and focusing on getting a good rate of return on your money. With this advice, they would potentially go out and risk all their money in the stock market. If the market crashed and they lost a significant amount of money it would not be a concern to them because most of their retirement income was coming from protected sources. These clients could afford that loss and move on.
Unfortunately, this retirement model for our generation is currently broken and completely flipped upside down. Pensions seem to be all but gone (or extremely difficult to come by) and the retirement benefits from social security have dwindled down dramatically from what previous generations received. So where is the rest of your income going to come from? The answer is you. Most of the risk now is on you–the consumer–to make sure you have enough money to last throughout retirement. Yet, this directly contradicts the message we’re all being conditioned to believe: Continue to focus on growing your assets as much as possible and get the highest rate of return on your money.
I am here to tell you that the only way to have a successful retirement plan is to have an income plan that is guaranteed to life expectancy and will not lose any money to dips and fluctuations in the stock market. The strategy used to accomplish this goal is straightforward and used to protect and grow assets. It involves moving a portion of your money into a fixed indexed annuity (FIA) with a guaranteed lifetime income rider. An income rider is the contractual guarantee from an insurance company to pay you no matter how long you live. This strategy puts insurance on your retirement income and leverages your risk to an A-rated insurance company. It’s the same with medical insurance. Your provider is there to help take the financial burden away from you in the case of a health or medical emergency. You wouldn’t leave your health to chance, so why wouldn’t you want to have insurance on your retirement income?
The definition of an annuity is a fixed sum of money paid to someone each year, typically for the rest of their life. You may not know it, but if you are paying into social security, then you are currently participating in the biggest annuity plan in the United States. The definition and strategy changes depending on who is paying you. Social Security comes as payments directly from the government. A pension is guaranteed lifetime payments from an employer. An annuity is guaranteed lifetime payments from an insurance company.
There are so many risks that we must protect ourselves from in retirement. FIAs typically focus on addressing three main risks: Stock market volatility, longevity, and inflation. How many times did you turn on the news this last year and hear the word “volatility?” Every time that message is broadcast it typically means that your retirement account just lost money, which is going to directly affect when you retire and how much money you will receive. When you move your money into an annuity, you are taking your money out of the “investment” category and into the “indexed” category. This means that your original principal is completely protected from the negative returns you see in the stock market. So, the next time you turn on the news and see those treacherous headlines, you will have peace of mind knowing that your money is protected.
Longevity means that you are going to have a long life. It is hard to think of this as a risk because it means that you are healthy and plan to live to age 90 or above. I call longevity the risk multiplier. The longer you live, the more likely you are to see high inflation rates and more volatile markets. If you plan to have a long and healthy life, then you need an income stream that can last your lifetime. The FIA with an income rider is a contractual guarantee by an insurance carrier that those payments will last your lifetime. You can live up to 110 years old and still get payments sent to your mailbox. If you are currently married there is a 50 percent chance that one of you will live to at least 90 years of age, so it is extremely important to guarantee an income stream for the surviving spouse.
A retirement risk that I cannot ignore, especially in today’s climate, is inflation. Inflation is defined as the general increase in price and decrease in purchase value of money. This means that if your income in retirement does not increase each year, then you will not be able to afford the same goods and services that you did the day you retired. Depending on the acceleration of the price increase, this could really burn a hole through your wallet! I call this the stealth tax. There are many annuity products that have increasing income options on their income rider products. These are typically tied to market performance and as long as you do not get a zero percent return, then your income will increase.
Whenever you are planning your retirement, you always want to keep in mind your “why.” Most people’s “why” is protecting their spouse and kids to make sure they are taken care of financially in any situation. I would argue that you should be your why. Think about it. If you run out of money in retirement, who is going to take care of you? Typically we see the spouse or kids needing to pitch in their money and assets to take care of their family members who did not create or follow through with a plan that would take care of them until they actually pass. By putting a portion of your money into a fixed indexed annuity with a guaranteed lifetime income rider, you are creating an income plan that will alleviate stress in the lives of you and your family. People who have money in FIAs do not lose sleep at night over negative downturns in the market because they know that they have a check from the insurance carrier coming to their mailbox each month no matter what happens to their investments.