You know what they say about the best-laid plans going bad, well, with what’s happened in the financial world this year, that’s what’s happened to countless retirement plans.
Take the example of a hypothetical retiree who, until recently, thought she was ready. Our example investor has postponed formalizing her retirement income plan until she begins taking Social Security at age 70 and making withdrawals from her rolling IRA. It was December 2021. Inflation seemed reasonably under control; markets were doing well; and with 50% of his $2 million portfolio invested in bonds, it was pretty conservative.
Social Security and a pension totaling $60,000 a year helped her reach her starting income goal of $150,000. The balance of $90,000 came from his $2 million in retirement savings.
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Even after having to withdraw some of her personal savings to meet her income goal, she was also leaving a strong legacy, assuming historical market returns. She used a traditional approach to income planning based solely on her investments. She was fine and felt reasonably safe.
Like many like her, including financial experts, she didn’t anticipate market fluctuations for something like what happened next.
What happened during the first 6 months of 2022?
Sometimes the consequence of market volatility is that you simply have to cut back on your expenses during unexpected tough times. The same thing could happen to you after retirement if your plan does not take into account the real possibilities. So here’s what’s happened so far in 2022.
- First, inflation hit, up more than 8%. A recent investigation (opens in a new tab) found that in response to higher inflation, 35% of people planning for retirement reduce their social activities and 28% spend less on travel in order to maintain or increase their retirement contributions. Our investor was not ready to make drastic lifestyle changes.
- Second, due to declining markets, the share of its growth equity investment portfolios has fallen more than 30% since the start of 2022. (The high-dividend equity share held up for a while but ended up dropping more than 8%.)
- Third, the value of his fixed income portfolio fell about 14%, reducing both his rolling IRA and his personal savings accounts. She was definitely not prepared for this.
- Fourth, the combined effect was that the savings she used to withdraw her income (the rolling IRA plus some personal savings) were down more than 20%. Her bonds had not protected her.
What have these developments done to his retirement income plan?
Many people get shy at times like these and don’t even discuss what the long-term results might have on their plan, but our investor wanted to fully update his plan based on current market conditions. Here’s what she discovered.
Looking at inflation, our investor estimated that his living expenses had increased by $10,000 per year, bringing his income goal to $160,000. (She believed there might be a lower rate of inflation in the future.) Her Social Security and pension will still contribute $60,000 a year (good for that), so her retirement goal from l savings is now $100,000.
With his retirement savings below $1.6 million, using the previous strategy will only produce $74,000 a year in starting income, which is $26,000 less than his new budget. If she believes in a lower inflation rate in the future, say 1%, her plan income would be $82,000, or another $18,000 less. Using more of your savings to make up for this shortfall reduces your inheritance and even increases the risk of running out of money.
Let’s go back in time and see how a Go2Income plan would have worked instead.
What you can get with a Go2Income plan
The main differences between Go2Income and traditional income planning are:
- Annuities as a source of income.
- Lower allocation to stocks overall, but with a higher allocation to high-dividend stocks.
- An algorithm that integrates all sources of income.
So, let’s see how this plan would have worked.
His starting income from savings in December 2021 would have been over $100,000, giving him a cushion of $10,000 from his original $90,000 in savings. And because of the annuity payments in the mix, more of the income would be safe and less would be taxable.
At the end of June 2022 with the different equity allocation under the Go2Income plan, the value of his invested savings would have fallen by only $245,000, compared to $400,000 under a traditional plan. His income under an updated plan backed by lower savings fell, but only to $91,000.
To reach her new savings goal of $100,000, she is willing to assume a 1% lower inflation rate, thinking she can adjust gradually, and her new income is $100,000, which which brings the total back above $160,000.
Of course, she can’t go back in time.
Convert your traditional plan to a Go2Income plan?
While blaming herself for not adopting Go2Income sooner, she doesn’t want to make her problems worse. So what would a new Go2Income plan look like from the original plan’s $1.6 million? She was pleasantly surprised to learn that she would still be fine. The reasons why include those listed above, plus one more – annuities are even more attractive now due to an increase in interest rates.
Without any changes in assumptions, his income under a new Go2Income plan as of June 30, 2022 would be $88,000, even starting with savings of less than $1.6 million; if she lowers her inflation expectation to 1% per year, her income is $97,000. Here is a photo of his new plan.
(Image credit: Courtesy of Jerry Golden)
Note: DIA stands for dividends, interest and annuity payments; SPIA stands for Single Premium Immediate Annuity.
When it plans to change its planning method, it must ensure, as far as possible, to take into account the tax consequences of such a change. She can, of course, stay with her current investment advisors or manage the money herself if she prefers.
It has been a very difficult six months – and it could continue. She is grateful that she was able to secure her retirement plans.
Final Thoughts
Still a thoughtful investor, however, she asked if annuity rates might rise further in the future. Although very likely, there is the risk of delay, lower cash flow, greater exposure to risk and more unfavorable tax treatment. The smart trade-off may be to implement immediate annuity payments now and delay future annuity Payments.
By the way, she shouldn’t berate herself too much for not adopting a Go2Income plan sooner. Although there was an economic loss to having delayed, the real loss was a loss of sleep. As we said, Go2Income is designed to provide a safer retirement.
We can help you if you have a similar situation. Visit Go2Income for a free custom plan (opens in a new tab) which offers both high starting income And more and more lifetime incomeas good as long-term savings.