Sunday, February 21, 2010

Using Systematic Payouts for Income

While there is no “one size fits all” model which can be used to determine the savings necessary for the retirement years, there are some benchmarks and rates of return, which are realistic measures for making projections. Most of us don’t want to see our standard of living and quality of life deteriorate during our retirement years, so retirement income needs to be close to working income, especially if travel or vacation homes are included in those retirement dreams. However, most defined benefit plans have a payout ranging from 40% - 80% of working income, with most being closer to the lower end of the range. Many companies have stopped using defined benefit plans all together, opting to utilize defined contribution plans, such as the 401k, SIMPLE or SEP.

So what is a realistic rate of return and retirement asset goal? Let’s look at the rate of return first. Prudent advisors and investors realize long term averages have to be considered in making projections, and 8% has been the rule of thumb used for calculating investment rate of return. This is based on long term bond performance. The historical return for the stock market has been closer to 10%. How much do you need for a comfortable retirement? That is a personal question for each retiree, but I’ll run through a couple of scenarios to show how systematic payouts from your investments can help stretch out your income. A systematic payout is basically reverse dollar cost averaging. It means taking withdrawals of retirement income on a monthly basis, the same way the money was saved prior to retirement. The type of investment vehicle could be a rollover IRA, which receives defined contribution balances after retirement, or when changing jobs.

If you have saved $750,000 by the tme you are ready to retire, and draw 10%, or $75,000 annually, and you earn a rate of return equal to 8% annually, the money will last 18 years. The same $750,000 in the Growth Fund of America, using the returns of the last ten years, which include the bear market’s losses, and gaining only 8% thereafter, would last 25 years. If a client placed the $750,000 in one of the newer annuities, with the Guaranteed Minimum Income Benefit, and draws 6% a year, which is $45,000, and the GMIB return is 6% a year, the balance will never fall below $750,000. Therefore, the client’s heirs would get the $750,000 as a death benefit and possiby more, if the market returned more than the 6% GMIB.

While there are concerns about the solvency of Social Security, my feeling is the government will keep the social pact it has made with the workers of this country, and maintain some form of retirement benefits for its citizens, even if the age of retirement is extended and benefits are not as generous as today.

John H. Kaighn

Jersey Benefits Advisors

Middle Twp. Middle School Guidance Department