The retirees in our story are living in the age of decumulation where people fear living too long and running out of money in retirement. For one couple who planned ahead, they enjoyed a reliable, stable retirement. For our other retiree, it was too late to change his circumstances, and he struggled in retirement. This tale illustrates how you can thrive rather than survive during retirement.
It was the best of times for Mr. and Mrs. Darnay. They retired in 2019 and began to fulfill some of the dreams they had envisioned while they were working and saving. Under the guidance of their financial advisor, they created a retirement budget for essential and non-essential expenses. With a portion of their qualified plan assets, they purchased guaranteed monthly lifetime income to cover all of their essential obligations. Distributions from qualified plans and IRAs are not subject to the 3.8% Medicare surtax, so the Darnays were able to avoid this tax and use the full purchase price to buy the most income.
In addition, they only pay income tax as payments are received, rather than on the total lump sum used to purchase the annuity. With the remaining assets in their retirement portfolio, they’re able to invest for growth, knowing they’ve covered their fixed expenses. They spend very little time watching the market and monitoring their portfolio and more time doing the things they enjoy. They have peace of mind, knowing that each month they receive a steady income from their annuity that will continue for as long as they live.
It was the worst of times for Mr. Carton. He also retired in late 2019 with savings through his company’s 401(k) plan, but he had not worked with an advisor prior to retirement. He didn’t have a firm grasp on his essential expenses and simply relied on his paycheck to cover his bills as they came due. A few months after retirement, the stock market saw one of its steepest declines, and Mr. Carton became quite concerned that he had not prepared for a downturn or the possibility of outliving his savings.
He met with a financial planner who helped him catalog his essential expenses and gave him the sobering news that he would have to cut back on some of his spending in order to make his retirement assets last longer. Together with his advisor, they regularly monitor his investment returns and adjust his spending, depending on the results. His monthly cash flow fluctuates, so if he wants to spend for vacation or make a major purchase, he checks in with his planner first to determine when the best time is to withdraw the money. His portfolio is made up of less risky investments to minimize the risk of running out of money. He has contemplated going back to work part time to cover more of his monthly bills and slow down withdrawals from his retirement savings.
As our tale illustrates, purchasing a guaranteed stream of income can provide benefits beyond replacing a paycheck. It can provide peace of mind and the freedom to invest your remaining portfolio for growth so that you can enjoy the retirement you worked so hard to achieve.