Do You Want Lifetime Income in Retirement?
A few weeks ago, I met with Tamiko Toland, fellow Woman of a Certain Age(ncy), Principal of Toland Consulting, and Co-Founder and CEO of IncomePath, a new way to visualize retirement income intended to provide “freedom to spend” by enabling advisors and their clients to see how the use of guaranteed income can benefit their retirements.
That’s a mouthful, I know. And it’s complicated if you don’t operate in this space. But Tamiko’s nickname isn’t “The Annuity Yoda” for nothing. And she’s both a 20+ year veteran of TIAA and a sought-after expert in retirement risk mitigation. She is committed to doing a better job of educating the public and helping advisors educate their clients in how to build the lifestyles we all want in later life.
And the key word is “lifestyle,” because it’s much more effective to ask people what kind of lifestyle and legacy they want for their second half rather than how they plan to mitigate the risk of running out of money.
The conventional wisdom is that portfolios should become more conservative (i.e., contain a greater proportion of bonds to stocks) as we age. We become a bit more fearful as years pass and determine it’s more important to protect our principal than to grow our wealth. And that very real instinct can cause us to curtail how much we enjoy retirement. It can also risk our portfolios’ ability to keep up with inflation.
By concentrating on the lifestyle we want to lead and the legacy we want to leave, IncomePath helps clients better articulate their goals. In turn, that helps advisors recommend changes in their clients’ portfolios.
Here's how it works: You and your advisor look at your portfolio as it is currently allocated. You then assess two things:
1. How your lifestyle and legacy will change if you add guaranteed lifetime income.
2. How much wiggle room you have (because you have guaranteed lifetime income) to make your portfolio less conservative without adding additional risk.
That’s it. Easy peasy.
It’s a straightforward process, according to Tamiko. She asks, “What are your essential expenses? What’s not covered by Social Security?” Then, she suggests filling the gaps with guaranteed income to create poverty avoidance.
“But you’re not just getting guaranteed income,” she says. “There are other sources, such as the withdrawals from the portfolio. So, when you think of the two sources together, it enables you to achieve more of your aspirational goals.”
IncomePath looks at guaranteed lifetime income as a fixed income source. Indeed, the income replaces bonds in the portfolio. In truth, lifetime income can be superior to bonds in that it can’t be exhausted. Eventually, you spend the bond proceeds when they mature. Unlike bonds, lifetime income isn’t subject to interest-rate risk.
Tamiko asserts that if we approach retirement only from a place of fear, it inhibits what we want to do in retirement, and we’ll want to have some growth potential as well. For her, envisioning the income guarantee as the conservative part of the portfolio while looking at the overall portfolio makes it possible to say, “I can take a little more risk with some of my holdings because I’m not taking money out of my portfolio to support everything.” In other words, you have an income “floor.” She describes it as “taking risk without really taking risk.”
IncomePath doesn’t choose the tool that will provide the lifetime income. Nor does it recommend whether the money comes from a retirement account or a non-retirement account. That’s for your advisor to figure out. But to be clear, this solution is an income annuity. And I know that freaks some people out; the notion that you would commit to something you can’t undo. And what if you die young?
Stop. Just stop. Because you may always configure the solution with a guaranteed payout for a certain number of years. In that case, the proceeds would go to your beneficiaries.
I’m a fan of #NotYoungNotDone Tamiko, her new tool*, looking at the whole financial picture, and using guaranteed lifetime income to replace some bonds in a portfolio. And yes, I have an income annuity of my own, although I have not yet begun taking my monthly check.
On a related note, there is a big push for 401(k)s to offer income annuities as a way to distribute assets in retirement; not for the entire portfolio, but perhaps 30%. This is in response to the failure of the 401(k) solution at large; and it seeks to provide increased financial security to Americans.
It’s a good start to improving outcomes for those at risk of running out of money.
Here’s the deal: You must ask your advisor for this model; specifically, “How would an income annuity improve the success of my retirement?” Not all advisors are willing to do the math of a bond portfolio vs. an income annuity. But the research is clear: If you are at risk of running out of money during a very long retirement, an income annuity carved out of the bond portion of your portfolio has multiple benefits and will give you the peace of mind that lifetime income (a.k.a., a personal pension) provides. #WeRescueOurselves
* No compensation was received for making these statements.
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Copyright © Madrina Molly, LLC 2024. All rights reserved.
The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice
Sherry Finkel Murphy, CFP®, RICP®, ChFC®, is the Founder and CEO of Madrina Molly, LLC.
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