The 60/40 portfolio has always been considered a safe, conservative strategy for retirees seeking stability, not big returns. But that strategy sank like a stone in 2022—investors who allocated 60% of their savings to stocks and 40% to bonds lost 16% of their savings, on average, last year.
Lesson: Even a diversified investment portfolio cannot on its own deliver the low-stress, low-drama financial life that many people seek in and near retirement. If that’s what you’re after, consider these three risk-reducing, guaranteed income-generating strategies. Retirees can use all or any portion of these strategies.
Strategy: Consider a Single-Premium Immediate Annuity (SPIA). A SPIA converts a lump sum of cash into a “retirement paycheck.” Guaranteed payments begin virtually as soon as the SPIA is purchased and continue for a predetermined number of years…for the remainder of the buyer’s life…
or for the remainder of the buyer’s life and his/her spouse’s life, depending on the terms selected. SPIAs stand out from other annuities and insurance products for their predictability and simplicity—there’s no risk that the issuing company will increase future premiums, because there are no premiums…their payouts don’t vary depending on some unpredictable underlying factor such as stock market returns…and there’s no need to trust an insurance salesperson’s complex projections about how much the annuity will pay. Ways to use a SPIA…
Option #1: Consider using a portion of your retirement savings to purchase a SPIA that pays out each month for the rest of your and/or your spouse’s life.
Option #2: Consider a SPIA that provides recurring income for only the next 10 years of your retirement. This type of SPIA is especially straightforward—you know precisely how much you are paying and how much you’re getting back from the investment, and there is no need to estimate life expectancies. A 10-year SPIA will provide a stable and potentially sizable income during the early retirement years so you can travel and enjoy yourself while you are still healthy enough to do so—without worrying about short-term stock market fluctuations. Example: A recently retired couple with $2 million in retirement savings paid $680,000 for a SPIA that provides $80,000 in annual income for the next 10 years. That money covers their expenses for a decade, allowing them to leave their remaining $1,320,000 of savings untouched to recover from recent losses.
Strategy: Make a donation through a Charitable Remainder Trust (CRT) or a charitable gift annuity. This one’s a win-win—you gift a lump-sum gift to a charity…and receive a dependable income stream and get a tax deduction for the year in which you give the lump sum if you itemize, although you can carry forward the deduction for up to five years if you don’t use it for the first year. If you plan to leave money to charity in your will anyway, this is a way to make that gift sooner and create secure retirement income. Ways to do this…
Option #1: With a CRT, you gift assets such as cash, stock or real estate to an irrevocable trust…that trust makes recurring payments to you (the older you are, the larger the payments)—or to some other beneficiary you select—for a specific number of years or for life. Then whatever remains in the trust goes to the charity you named. The applicable federal rate determines how much you receive depending on your age.
Option #2: With a charitable gift annuity, you give assets directly to a charity with a contractual agreement that the charity will pay a percentage of your donation back to you each year for the rest of your life—large nonprofits are most likely to agree to these arrangements. The size of the payments and tax deduction you receive depends in part on your age—the older you are, the larger they will be. Example: If you donate money through a charitable gift annuity at age 60, the IRS allows you to claim half of the amount donated as a tax deduction in that year (or the deduction can be carried forward for up to five years) and the charity can pay you 5% of the value of your donation annually. Note: At least 10% of the initial fair market value of the amount transferred must eventually go to the charity.
Strategy: Delay the start of Social Security benefits. Concerns about the future of the Social Security system are persuading some people to start receiving benefits as soon as possible because they want to get as much as possible out of the system before benefits are reduced. Instead, consider doing exactly the opposite—wait until age 70 to start benefits.
Note: It is reasonable to have concerns about future Social Security benefits reductions. Unless changes are made to the system, Social Security will be able to pay recipients only 75% to 80% of the benefits they are due beginning less than 15 years from now. But the odds are low that people who are in or very near retirement age now will have their benefits substantially reduced. More likely, the payroll taxes that wage earners pay to support the system will rise…“full retirement age” will slowly ratchet higher for future retirees, much as it was slowly increased from age 65 to 67 over the course of recent decades…and/or a higher percentage of Social Security benefits will be subject to income taxes. Only one of those possibilities—the increased taxation of Social Security benefits—is likely to significantly affect people who already are in their 60s or older. And while no one likes tax hikes, most financially successful retirees already are paying taxes on 85% of their Social Security benefits, so paying taxes on the remaining 15% would not be a major setback.
On the other hand, if your goal is a safe and secure retirement with lots of guaranteed income, delaying the start of Social Security benefits from age 62 to 70 could be hugely beneficial. Example: If your monthly benefit would be $3,000 at your full retirement age of 67, you would receive $2,100 each month if you claimed your benefit at 62…or $3,720 if you claimed it at 70. That’s $44,640 per year versus $25,200. Maximizing Social Security benefits is among the very best ways to lock in retirement income because these benefits are paid each month as long as you live…surviving spouses often can claim them, too…and they increase to keep pace with inflation.
Helpful: Consider combining delayed Social Security benefits with the SPIA mentioned on page five. Use a 10-year SPIA to provide guaranteed monthly income for the early years of your retirement…then start your maxed-out Social Security benefits at age 70 to provide guaranteed income for the remainder of your retirement.
Choosing a Financial Advisor
Buying an annuity or life insurance policy requires committing a significant amount of money to an insurer and financial advisor/broker. It is important to choose trustworthy providers. Recommendations from friends is a good place to start. Also…
Confirm the advisor or broker has been in the sector for at least 10 years. He/she should be at least 50 years old—young people may fail to understand older consumers’ priorities—and have meaningful designations such as Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and/or Certified Financial Planner (CFP). It’s also a good sign if a financial pro has passed the “Series 7” exam.
Look up the advisor and firm on BrokerCheck.FINRA.org, a website of the nonprofit Financial Industry Regulatory Authority (FINRA). It lists problematic “disclosures” about advisors, such as regulatory actions, legal issues and bankruptcies…as well as details about their employment history. Avoid those who jump frequently from employer to employer.
Ask, “What annuities/insurance policies/investments do you own?” when you meet advisors or brokers to determine whether a pro is competent financially…his philosophy is compatible with your own…and he is recommending companies that he believes in.
When a broker recommends a specific annuity or insurance product, ask, “Is the company selling a mutual life insurance company or a stock life insurance company?” A mutual company has a fiduciary responsibility to do what’s best for its policyholders. Stock companies, on the other hand, have a fiduciary responsibility to increase value for their shareholders. Exception: If you have health issues and are trying to obtain a whole-life policy, you might have to work with a stock company—mutual companies might be too picky to offer you a policy.
Confirm that the insurer issuing a policy or annuity has a Comdex rating of 95 or above. A Comdex rating is a composite score of the grades from the five major credit agencies. Enter the terms “Comdex,” “rating” and the name of the insurer into a search engine to find this. If an insurer has a Comdex rating below 90, look for a different one.