The Baby Boomer generation is retiring in record numbers with more debt, better health, and longer life expectancies than any generation that came before. Pairing actuarial science with investment returns can help this generation live better during their retirement years.
MANCHESTER, NH – 11/12/2016 — The Baby Boomer generation—those born between 1946 and 1964—are retiring in record numbers. More than 30,000 people per day are moving into their post-employment phase of life and this trend is expected to continue for at least the next 13 years. This high retirement rate coupled with an extended life expectancy, which hit a record high of 76 years for men and 81 years for women in 2014, means that retirees have to be even smarter with how they manage their money and the financial products in which they invest. With all of these people pulling their money out of the market for their retirement, managing both investment and longevity risk are two key components to ensuring that one’s retirement savings will last for the duration of one’s retirement, but many working Americans don’t adequately understand how to mitigate longevity risk.
“There used to be professionals managing all of these retirement accounts on behalf of companies, government entities and their workers, but now all of the longevity risk and risk of investment has been passed on to employees,” notes Stephen Mathieu, owner of Legacy Financial Solutions, Inc. a wealth management firm located in Manchester, New Hampshire. “Companies and government entities made annual contributions to Defined Benefit Plans, taking into account their actual investment returns, plan expenses, and the expected lifetime benefits they would have to payout. Their actuaries calculated the deposit required annually to fund these costs and expected future benefits.”
That all changed in the 80s, with the introduction of 401(k) plans and IRAs. A combination of underfunded pension plans, combined with the desire of the employees to exercise more control over their own retirement accounts, led to a substantial reduction of defined benefit plans. The result was that people became responsible for funding and managing their own retirement funds.
“Ask the average person and they will have no idea what an actuarial table is or how it works and they are, therefore, missing a major part of the equation when it comes to planning for retirement income. Relying on rates of return alone won’t determine if the portfolio will last a lifetime,” says Mathieu.
Currently, most people take withdrawals based upon their need and the size of their portfolio, often using an assumed interest rate. Using this approach, one must recognize that “Monte Carlo”* market simulations (using a 50/50 stock/bond split and over 5000 iterations on data compiled over the last hundred years) suggest that withdrawing money from retirement funds at a rate of 3% (inflating the distribution annually by 3%) has about a 99% probability of lasting 35 years. So, for example, if a man or woman retires at 65 and begins drawing on their retirement funds at this rate, this means that they have a 99% probability of not running out of money by age 100. That would mean withdrawals starting at $30,000 a year on a $1,000,000 portfolio. A $40,000 annual withdrawal would reduce the probability of success to 89%.
Using actuarial science in this example, the same man or woman – using an annuity with a guaranteed lifetime income rider– would be able to draw an annual income of around $58,000 or more, with a 100% guarantee of not running out of money.** This significant difference is because the insurance companies take into account the fact that some people will live beyond their actuarial table life expectancy and others will die prior to the life expectancy. The longer living people get what are called “mortality credits” from those who die at the younger ages.
But it gets better: annuities offer principal protection against market risk. “People who utilize these alternatives are typically able to increase their retirement income by as much as 30-40%,” opines Mathieu—who recently completed his first book, where he shares retirement income planning tips. “This allows them to do more with their families and for their communities, without fear of running out of money.” For the 10,000 Baby Boomers per day who are retiring, the decision to incorporate annuities into their overall retirement plan could be a profitable one!
* The term “Monte Carlo” is a term often used to describe risk based plans. It implies that a certain gamble is taking place.
** Guarantees and protections provided by annuities are based upon the claims paying ability of the issuing insurer. Annuity riders are generally optional and associated with an additional cost.
Funlayo E. Wood contributed to this article.
For more information, please visit http://www.legacynh.com
Company Name: Legacy Financial Solutions, Inc.
Contact Person: Stephen Mathieu Investment Adviser Representative, Licensed
Country: United States