Every retirement portfolio’s primary job is to provide you with enough income, month in and month out, for as long as you live.
But in today’s low-yield environment, many investors are finding that their savings are likely to fall short. The 10-year Treasury bond is yielding just about 1.9%, while AAA-rated 10-year corporates are yielding about 2.3%. Both types of bonds face interest-rate risk: The likelihood that their value will plunge as interest rates rise. (Five-year certificates of deposit, meanwhile, are yielding a miserable .84%.)
As paltry as bond yields are right now, experts say safe bonds are exactly where retirees should be. Under a long-accepted retirement planning rule, investors should subtract their age from 100 to determine how much of their money should be in safe assets—i.e. bonds, versus the market.
A 65-year-old, for example, should have just 35% of his assets invested in a risky category like stocks. Simply put, he doesn’t have the time to recover from a big stock market drop. The rest of his assets, 65%, should be invested in safe, high-quality bonds.
Historically, retirees with properly balanced portfolios have been able to safely withdraw 4% a year without running out of money. But today’s low-yield environment has thrown a wrench into this equation. Traditional withdrawal rates can’t be sustained when fixed-income investments are producing anemic income. The bottom line is unless they make adjustments many retirees may end up taking more money from savings than they can afford.
Against this backdrop, many investors and advisors are taking a good look at annuities. Annuities have been maligned, often with good reason, as overly restrictive and expensive. But using annuities as a kind of pension plan (rather than an investment) is a different story.
In the right situation, I believe that a quality annuity can be part of the solution for today’s retirement income dilemma. With the right annuity, retirees can rely on enough guaranteed income to cover at least a good chunk of their needs for the remainder of their life.
Here’s an example: Let’s say that a 60-year-old male invests $300,000 in a single-premium deferred annuity. One popular annuity of this sort would provide $33,000 a year in guaranteed lifetime income, starting in 10 years.
That is the sort of income stream that would be very hard for a safely allocated market portfolio to match. In fact, that 60-year old investor would have to earn 14.5% a year on his worst-performing assets, each and every year without fail. And with the lion’s share of his money in safe assets like bonds, he’d have virtually no chance of success.
As you can see, relying on annuities as a guaranteed source of retirement income can provide invaluable peace of mind as well as help to secure your retirement. Please don’t hesitate to contact Anderson Retirement Solutions at 888.473.6931 if you’d like to learn more about meeting your retirement income needs.