Imagine you decide to retire at the end of 2021 and plan to spend $25,000 each year from a balanced portfolio of $500,000 of stocks and bonds. Before this year, you would have had about an 80% chance of being able to finance 30 years of income. Fast forward to today, when your portfolio is down 20% or more, would you still feel comfortable spending $25,000?
How much would you pay to know that, despite recent poor market performance, you could still withdraw $25,000 a year and not have to worry about your investments going down or even your lifespan?
This type of protection is available through a lifetime income benefit on annuities, also known as a lifetime withdrawal benefit, or GLWB. Designed to protect retirees during market downturns, GLWB annuities allow retirees to generate a specific amount of income, which can potentially grow throughout retirement, regardless of their lifetime or portfolio performance. .
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Retirees appreciate lifetime income insurance because it reduces the emotional burden of investment losses. Without it, uncertainty can lead to anxiety that affects quality of life in retirement. Nearly two-thirds of consumers said they worry about their finances several times a month, and a quarter worry about their finances every day, according to the Third Safe Retirement Income and Planning Study (opens in a new tab) Alliance for Lifetime Income and CANNEX.
In a new white paper (opens in a new tab) published by the Retirement Income Institute, we explore how to think about the costs associated with securing a lifetime income. There are no free lunches in personal finance, so it’s important to understand the cost of providing retirement lifestyle insurance, typically about 1% of account balance, for life, to provide warranty.
These costs are often mistakenly considered as “expenses” or “fees”, and not as an insurance premium. The first describes the reduction in value of the investment in exchange for an immediate service – the sale of a financial product, for example – while the second is a payment made to an insurance company in the hope that Part of it will be returned to the insured per claims they make.
Like any other form of insurance, annuities can protect you against a significant loss of wealth that might otherwise have occurred due to the market downturn. For those who are retired or planning to retire, leaving your assets unprotected means jeopardizing the lifestyle you envision for yourself.
Many retirees have found that the peace of mind is worth the insurance premium one pays for a guaranteed lifetime income insurance premium. Protected income streams can help provide you with the retirement lifestyle you want, no matter what happens in the markets. Today more than ever, retirees are seeing the benefits of integrating these benefits into their financial plan.
David Blanchett is Managing Director and Head of Retirement Research at PGIM. Michael Finke is Professor of Wealth Management, Director of the WMCP Program, Director of the Granum Center for Financial Security, and Frank M. Engle Chair of Economic Security at the American College of Financial Services. Both are members of the Alliance for Lifetime Income – Retirement Income Institute.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
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