Designing a retirement plan can feel overwhelming. Retiring
is one of life's most significant transitions and should be
entered into through careful planning. Retirees should start by
deciding how to replace their needed income. Base Income should
be matched up against your Base Expenses
1
(essentials - food, housing, medical, transportation, etc.).
Base Income should be secure, stable, and sustainable.
2
Since no individual knows how long they will live (their own
personal longevity), Base Income should be created from sources
that are paid over lifetime - however long that is. This
article is aimed at offering you some viable approaches to
income planning for your unknown lifetime.
In this context, here are a few options you may consider as
viable when creating your Base Income streams and a brief
summary of each. Deciding when and how to use any of these are
beyond the scope of this article, but there are ways to
maximize or optimize any of these options when creating an
individually secure retirement Base Income Funding
strategy.
Social Security
Social Security may represent a significant strategy in your
overall retirement plan. Steve Goss, the chief actuary of
Social Security was recently interviewed by Reuters.
3
Here is how he described maximizing Social Security
benefits:
Q: …Is there a way for people to "buy" more Social
Security than they could otherwise get?
A: There's one way to do this that is discussed
extensively. Social Security uses a formula called the
primary insurance amount, or PIA. If you wait to start
receiving Social Security until your Full Retirement Age
(FRA), you get 100 of your PIA. If you take it at 62, when
you first become eligible, you get only 75 percent. But if
you wait until age 70, you get 132 percent of the PIA.
From 75 percent to 132 percent at 70 - that is close to a
doubling of the monthly retirement income that you can have
for the rest of your life. What's key on this is that Social
Security is one of the few providers of a true
inflation-indexed life annuity. So if people who do have some
savings would use those assets to push back the date that
they file for Social Security benefits, they can, in effect -
easily and at a very good rate of return - "buy" a
CPI-indexed life annuity.
Pensions
Traditional pensions, while diminishingly scarce in the
marketplace offer lifetime guaranteed income. All pensions are
different, some offer cost of living adjustments, while others
do not.
Low-cost Variable Annuity with Guaranteed Living Withdrawal
Benefits (VA/GLWB)
A low-cost variable annuity with guaranteed living
withdrawal benefits offers many the peace of mind to have some
market exposure with some protections. Income
"withdrawals would reduce the account balance in the VA,
and, if the account were depleted (by long life or poor
investment performance), the guarantee would kick in and
payments would continue for life."
4
The goal of this annuity structure is to try and use the
stock market to help stay ahead of or with cost of living
increases, while paying for some insurance on your future
income if the market does not perform well. Also, please note
annuity vehicles have special tax implications to consider.
Deferred Income Annuity (DIA)
5
Deferred Income Annuities are relatively new, but may
provide another means of guaranteeing retirement income.
Retirees pay an insurance company a specific amount of money
today, and in a stated number of years the insurance company
promises to deliver a monthly income check for life.
Single Premium Immediate Annuity (SPIA)
Unlike DIAs which promise income in the future, SPIAs are a
traditional annuity structure. Retirees pay a sum to an
insurance company now and the insurance company pays a monthly
check for a stated period or over lifetime.
All of the above listed options have opportunity costs, tax
implications, and pros and cons that should be evaluated based
on your individual situation. While there are many helpful
tools online, hiring a CERTIFIED FINANCIAL PLANNER
TM
practitioner from the Financial Planning Association (FPA) will
enable you follow a multi-step process that comprehensively
examines your retirement goals, needs, and will inform you of
your ability to meet these based on your total assets and
retirement income. If you are thinking of retirement, contact a
qualified financial advisor from FPA today.
FPA member Jason Branning, CFP
®
, is a fee-based investment adviser and financial planner
with CS Planning Corp. in Ridgeland, Miss. He owns Branning
Wealth Management LLC. www.branwealth.com .
References:
1. Base Expenses, as defined by Modern Retirement Theory,
are mandatory living expenses of food, shelter, clothing,
medical, transportation, and utilities.
2. The 3-SModel which is secure, stable, and sustainable is
a premise of Modern Retirement Theory. "Modern Retirement
Theory", Journal of Financial Planning's Retirement
Distribution Supplement, December 2009. Copyright Jason
Branning and Ray Grubbs.
3. "How to get the most from Social Security", Mark Miller.
Retrieved from:
http://www.readability.com/read?url=http%3A//finance.yahoo.com/news/most-social-security-180219632.html
on 4/17/2012
4. "Flexible Strategies for Longevity Protection: Comparing
Two Products" by Joe Tomlinson. Advisor Perspectives. April 10,
2012. Retrieved on 4/19/2012 from
http://www.advisorperspectives.com/newsletters12/pdfs/Flexible_Strategies_for_Longevity_Protection.pdf
5. "How to Create a Pension (With a Few Catches)." Anne
Tergesen. Wall Street Journal. Retrieved on 4/9/2012 from
http://online.wsj.com/article/SB10001424052970204571404577253853314354494.html