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Thayer Partners Blog

Has Wall Street Blinded You to Your Best Retirement Income Sources?

[fa icon="calendar"] Oct 5, 2015 2:30:00 PM / by Chris Wilmerding

Chris Wilmerding

Between 401ks, IRAs, bonds, and stock portfolios, there are a lot of ways to save for retirement that rely on your investment portfolio. This is why there are so many financial advisors that focus on optimizing your investment portfolio with the promise of growing it so that it will be a stronger income source in your retirement.

This sounds great, and it is, when it works—meaning the stock market cooperates. While building a strong investment portfolio through your 401k contributions, Individual Retirement Accounts (IRAs), and personal investments is an important part of preparing for retirement, the old investment portfolio shouldn’t be your only source of income in retirement.

There seems to be an attitude among many financial advisors that the investment portfolio is king among your retirement income sources. However, is that really true? There are many revenue streams that you can set up which are not dependent on the stability of Wall Street to provide income for your retirement.

Wall_Street_Retirement_IncomeThe question I have for you is, “has Wall Street blinded you to your best retirement income sources?

Before you answer, consider the following other income sources that can provide you with a paycheck to fund your retirement:

#1: Social Security

Every payday, American workers can look at their paychecks and see a certain deduction being made from their check for Social Security. This ubiquitous program has been helping Americans prepare for retirement since the Social Security Board was first founded on August 13, 1935 by President Roosevelt.

While the name of the organization later changed to the Social Security Administration, the mission remained the same. As stated on the SSA.gov website, the Administration’s mission is to “deliver Social Security services that meet the changing needs of the public.”

For many retirees, Social Security will be their single largest source of income in retirement. How large is this income source? Let’s dare to compare.

Let’s say that you have an investment portfolio worth $1 million. If you follow the popular 4% Rule, then you’d be taking $40,000 out of that portfolio each year to fund your retirement. Under the 4% rule, you take out 4% of the value of your investment portfolio each year to cover your living expenses.

If you are married and retired at the age of 66 in 2015 with the maximum Social Security income, you would earn $31,956, and your spouse would collect a spousal benefit worth $15,978. This income would total $47,934 a year in income, more than that million-dollar investment portfolio would bring in.

However, that “maximum Social Security income” isn’t actually the most income you can receive from Social Security, just the most at full retirement age (66 years old for most people nearing retirement). The SSA won’t tell you how to maximize your paycheck from the system, and there are over 70,000 ways to collect from Social Security.

Because of this, it’s very important to consult a retirement income planning advisor before you actually reach retirement age so that you can maximize your Social Security income before you start collecting.

It’s amazing to think that even a millionaire might get more mileage from Social Security than they would from the investment portfolio.

#2: Deferred Income Annuities

You’ve probably heard of bonds, or loans that you can make to a company in exchange for an agreed-upon return of principal plus periodic interest payments made per a set schedule. The concept of a deferred income annuity is somewhat similar to this.

AnnuityFYI.com does an excellent job of explaining how deferred income annuities, or DIAs, work, saying that a DIA is “a contract between you and an insurance company. You give a lump-sum payment to the insurance company in exchange for guaranteed* lifetime income that begins at a future date, up to forty years later in some cases.”

While the specifics of a deferred income annuity, such as the timing or ability to collect early may vary, these are considered a very stable, safe way to generate income in retirement that generates more income than an immediate income annuity would.

The one major drawback to this retirement income source is that, if you change your mind or your situation changes and you need money sooner rather than later, it isn’t very liquid. Some DIAs might have liquidity options, but, as the AnnuityFYI.com article states, “they can be difficult to invoke and are often subject to surrender fees.” Basically, once you make the commitment to a deferred income annuity, you lose all access to the money invested. It’s locked away, waiting for the agreed-upon date to be turned into a steady income stream in retirement. Another major drawback is that, because of the low interest rate environment, the projected income streams with a deferred income annuity are comparatively low.

Here’s where things can get confusing. Annuities probably shouldn’t be viewed as investments. Yes, advisors and retirees should consider carefully what you get by investing, say, $100,000 and waiting 10 years to turn on the income, but you don’t set up a deferred income annuity to make a fortune (or anything close to one). You buy a deferred income annuity for:

  1. Financial confidence because you fear future market gyrations;
  2. Because you want more steady or guaranteed income in retirement; and
  3. Because you fear outliving your assets, so you buy a product that generates income until the end of your life.

Since you are no longer in the Accumulation phase of life and moving into the Distribution phase of life where you need income distributions to pay the bills, this change in objective makes sense. One other major plus is that, for taxable (non-retirement account) money, a portion of this guaranteed income is tax-free return of principal until you reach life expectancy. There are options that can be added to a DIA, such as the joint-life option, which allows you to specify that the annuity is paid to you or your joint-annuitant for the longest of either person’s lifetime.

For many people, putting aside some money in a deferred income annuity can be a great way to create an extra dependable income stream in retirement—one that is guaranteed by an insurance company.

These are just two of the options that many retirees might ignore because they’ve been blinded to the opportunities by Wall Street money management-centric hype.

While growing the investment portfolio is important, it’s just as important to know how to potentially turn that investment portfolio into income in retirement and to do so in a way that can help meet your income needs.**

*Guarantees extend to the claims-paying ability of the issuer.

**Advisory services offered through Commonwealth Financial Network, a Registered Investment Adviser.

Topics: Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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