50 and over: what happens if your retirement income suffers? | Special Sections
So your retirement is finally approaching, and you’re about to turn your retirement savings into a stream of income that can help pay for your housing and food costs, healthcare, and other expenses like hobbies and travel. . So you can count on the same income year after year for the rest of your life. Sounds great, doesn’t it?
But what if your income takes a HIT? That accounts for health care, inflation, and taxes, and those are three big reasons why your retirement income may not go as far as you think over time. Here’s why. We know that as people age, their health care needs increase. And, what’s more, the cost of medical care has risen, an increase of almost 75% in the last decade alone.
But rising healthcare costs aren’t the only thing you need to worry about, as historically the general inflation rate for goods and services has been around 3% per year. It may not seem like much, but years of inflation can drastically reduce your purchasing power. To what extent?
Well, what if you had received the same amount of income every year for the past 25 years? Today, this income would buy only half of what it was before. And on top of that, there is also the possibility of increasing taxes in the future. And, not just higher federal taxes, but also higher state and local taxes.
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So while we can’t know exactly how much income you’ll need in retirement, we can tell you this: Even if you start out with what seems like a substantial annual income, these unpredictable rising costs, the HIT , could quickly eat away at your purchasing power and lower your standard of living.
That’s why, to help you plan for a comfortable retirement, you might consider a solution like an annuity. Especially our “split annuity” arrangement.
Annuities offer the potential for tax-deferred growth, a death benefit for beneficiaries during the accumulation phase, and a guaranteed income stream during retirement. But it can also have the potential to increase your income when your annuity includes an income benefit, such as an optional income rider which may have an additional cost.
We use annuities in our practice to secure this income stream and we arrange annuities in a special way that tends to replace income withdrawn to meet these HITs. This special arrangement is what we call the “split annuity” arrangement. Allow us to give some examples of split annuity arrangements. If I have a retirement account of $100,000 – I split that money between 2 annuities – an immediate annuity that pays $353 per month for 5 years or 60 payments. This immediate annuity will require $20,500 to make 60 payments of $353 each. The cash balance – remember we started with $100,000 and I’m using $20,500 for the immediate annuity. Balance of funds $79,500 I invested in a deferred annuity paying 5% – at the end of the 60th payment of the immediate annuity when the value of the immediate annuity is $0 – the value of the deferred annuity earning 5% per year is more than $106,000 – I replaced the amount placed in the immediate annuity – remember I started with $100,000 – and took an income of $353 per month for 5 years – so when the 60th payment of this immediate annuity is made, I know that I have $106,000 in my deferred annuity. Now I can split this annuity a second time and IF the interest on the annuity is greater than 5% – the accumulation value is that much greater as the monthly annuity payments may be a bit higher than those received previously.
The key to the success of this annuity – is where can I get 5% interest today…..there is a special type of annuity available today in which growth is tied to market growth – this annuity special is the indexed annuity. A fixed index annuity gives you the ability to accumulate without risking losing money in the market.
Yes, it’s important to have enough income when you retire, but an annuity with growing income potential can help offset rising expenses later on. So if the HIT comes, you are more ready for it. Our spitting annuity arrangements help with HIT by providing the ability to periodically increase income.
Richard J Schillig is CLU (Chartered life underwriter), ChFC (Chartered Financial Consultants) and LUTCF (Life Underwriter Training Council Fellow)
Richard J Schillig is CLU (Chartered life underwriter), ChFC (Chartered Financial Consultants), LUTCF (Life Underwriter Training Council Fellow)