Imagine that you decide to retire at the end of 2021 and plan to withdraw $25,000 each year from a $500,000 balanced portfolio of stocks and bonds. Before this year, you’ll have about an 80% chance of funding 30 years of income. Fast forward to today, when your portfolio is down 20% or more, can you still afford to spend $25,000?
How much would you pay to know that, despite the recent poor performance of the market, you can still withdraw $25,000 a year and not have to worry about how your investments are doing or even how long you will live?
This type of protection is available through guaranteed lifetime income benefits annuities, also known as Guaranteed Lifetime Withdrawal Benefit, or GLWB. Designed to protect retirees during market downturns, annuities with a GLWB allow retirees to generate a specific amount of income, which can potentially increase throughout retirement, no matter how long they live or how their portfolio performs.
Retirement value lifetime income insurance because it reduces the emotional burden of investment losses. Without it, uncertainty can lead to anxiety that affects quality of life in retirement. Nearly two-thirds of consumers say they worry about their finances several times a month, and one-quarter worry about their finances daily, according to a third. Protected Retirement Income and Planning Study (opens in new tab) from the Alliance for Lifetime Income and CANNEX.
In the new white paper (opens in new tab) published by the Retirement Income Institute, we learn how to think about the costs associated with guaranteeing a lifetime income. There are no free lunches in personal finance, so it is important to understand the cost of providing lifestyle insurance in retirement, typically about 1% of the account balance, for life, to provide insurance.
Those fees are often mistaken for “fees” or “fees,” not as insurance premiums. The former explains the reduction of investment value in exchange for immediate services – the sale of financial products, for example – while the latter is a payment made to an insurance company and the expectation that a portion of it will return to the policyholder through. claims they make.
Like any other form of insurance, annuities can protect you from significant loss of wealth that might otherwise have occurred due to market declines. For those approaching or planning to retire, leaving your assets unprotected means putting the lifestyle you envisioned for yourself at risk.
Many retirees have found that peace of mind worth of insurance premiums one pays to get guaranteed lifetime income insurance premiums. A protected income stream can help you afford the lifestyle you want in retirement regardless of what happens in the market. Now more than ever, retirees are seeing the value of incorporating these benefits into their financial plans.
David Blanchett is managing director and head of retirement research with PGIM. Michael Finke is a professor of wealth management, director of the WMCP program, director of the Granum Center for Financial Security, and the Frank M. Engle Chair of Economic Security at the American College of Financial Services. Both are Fellows of the Alliance for Lifetime Income – Retirement Income Institute.