February 28, 2020
I will bet we can all recall a time in our past that we found ourselves driving down the road at night, miles from the next exit, only to glance down at the fuel gauge and be seized with panic . . . it’s on empty! Then we start to do some quick mental calculus as we try to figure out the distance to the next gas station. Almost everyone has a story about a time they were close to or ran out gas, usually as a young driver. Hey, it’s happened to me. Luckily, my ever-resourceful Mom had insisted that I always keep a twenty-dollar bill folded up in one of the credit card slots in my wallet in case of emergency. It saved me one night when Jill and I first started dating. While distracted by life, I forgot how far the trip was back home after seeing her at college in Connecticut. Other than Mom’s emergency twenty, I had $1.17 left in my pocket forty miles from home.
Nowadays, even with the advent of low fuel lights and cell phones, I still try to pass on my Mom’s wisdom. I make sure my girls always have a Triple-A card and the Triple-A phone number with them when they head out. In the couple of years that Maeve has been driving and continuing on with the Phoebe and Sophie, they’ve never had a need to use it. I still pay the bill every month, despite some nagging thoughts that they’re smarter than their ol’man and won’t repeat my youthful mistake. And you know, I also realize that I’ll keep paying that bill until the twins finish college, knowing they may never need to be rescued with a gallon of gas or emergency tow. That’s okay, because you can’t put a price tag on peace of mind and the assurance I get ensuring my girls get to their destination safely.
Hmmm . . . I got thinking about this.
You know, I got thinking about what if we run out of gas in retirement? The single biggest fear in retirement for most people is that they are going to run out of money. This is called longevity risk, while dormant in our accumulation years, it is real in our distribution years. If fact, a research study by Allianz Life found that 60% of baby boomers are more afraid of running out money than they are of dying. The American Institute of CPAs (AICPA) polled financial advisors and found the top retirement fear of 57% of their clients is outliving their wealth.
Simply put, people are living much longer in retirement and, in many cases, are spending 25% to 35% of their life span in retirement. Furthermore, longevity brings the looming worries of increased health care and long-term care costs. On the political front, we hear the banging of the drums that social security benefits are not as secure as once believed and may need to be reduced or altered. As people age, they want to hold on to their independence and that comes with a cost.
It’s important to note that this fear of running out of money is rooted in reality. A report done by the Employee Benefit Research Institute (EBRI) shows that for baby boomers who live 35 years in retirement; 83% in the lowest 25% of income will run out of money; while 47% in the second lowest 25% of income will run out of money; only to have 28% of baby boomers in the second highest 25% of income achieve the same fate; and get this, 13% of boomers in the highest 25% of income will run out of money in retirement.
According to the report, the outcomes don’t significantly improve even for those living only 20 years in retirement. In the highest 25% of incomes, it’s anticipated that 8% will run out of money in retirement. That’s a bit frightening to think 1 in 12 of the highest earners will still likely see a monetary shortfall.
There are many factors that can affect this, including health issues and lifestyle decisions (particularly the ability to moderate and control expenses). And folks, as longevity increases, the goal posts keep moving.
Now, I know this all sounds pretty dismal. But it doesn’t have to be your destiny, especially as Cutter Family Finance faithful! There are a number of ways you can plan for a potential shortfall in retirement and avoid being one of these statistics. One tool that can be explored to address the fear of outliving one’s money is the use of a pension annuity to guarantee a level of lifetime income. Pension annuities have many different features that can be used to improve your financial situation, depending on what you are trying to accomplish. They are not a one-size-fits-all product and you need to carefully review them with an advisor who is a fiduciary to see if they make sense for your broader retirement system. Pension annuities ability to guarantee lifetime income and provide protection against the market’s downside risk often makes these financial instruments a great foundation for a sound retirement system.
It’s important to point out that, like any financial planning tool, that there is a lot of noise regarding annuities in the financial marketplace. Opinions abound, both pro and con, about whether they should be included in a retirement system. Also, their guarantees are based on the company’s solvency, which is why it’s so important to do your homework and consult with retirement specialist who can help you understand how they work. All of this should be done in the context of your own retirement system and not in the vacuum of broader marketplace.
Lastly, I recently read a paper written by the Brookings Institution in conjunction with the Kellogg School of Management at Northwestern University in June 2019. The main topic was “The Annuity Puzzle: Why Economists Love Annuities and Consumers Do Not”. The paper essentially states that economists look at annuities factually with an emotional detachment in addressing the threat of outliving your money. This is in contrast to what consumers do. Consumers incorrectly try to make an apples to apples rate of return comparison to investments, when pension annuities are really an insurance instrument used to protect against longevity risk and the associated risks tagged with it.
Folks, we never look at things as good or bad, just whether it is appropriate or inappropriate. So, before you dismiss a pension annuity, try and look at them objectively to see if they are appropriate for your system . . . or not. You might just find that if you add an appropriate pension annuity to your retirement system, it may just add that additional layer of certainty we’re all looking for in retirement.
They just may help ensure your retirement system doesn’t run out of gas!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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