I read a Forbes Magazine article back in September titled “Income During the Crash”, written by William Baldwin. It made me ponder the choices clients have for generating income from their savings—while considering the emotional roller coaster that comes with monitoring your investments regularly.
The “safest sounding” decision would be to convert your retirement savings into lifetime income by purchasing an immediate annuity that guarantees you monthly payments for as long as you live. While that may feel “safe”, we need to consider the hidden “risks” of such a product. First, immediate annuities don’t often include an annual cost-of-living increase. Second, you undertake risk that the insurance company can’t fulfill their promise (AIG on the verge of collapse in 2008?). Most importantly—you lose your flexibility, and your principal; there will be no money for your heirs. That is one HUGE, irreversible decision: to hand over your nest egg to an insurance company for the promise of lifetime income.
That doesn’t even take into account the “return” you’ll get on your money. These days, income from immediate annuities often nets you about 6% of the premium paid (i.e. money “invested”) per year. That’s not a “return” of 6%; that’s your money you’ll be getting back for the first 17 years. In effect, the insurance company is betting you won’t outlive the interest they’ll earn on your savings in those first 17 years. We think the best annuity you can buy is Social Security (untapped benefits after age-62 grow at nearly 8%!). If you’re considering an annuity for retirement income, the first step would be to defer your Social Security benefits until age 70.
In the Forbes article, Mr. Baldwin suggests you “Pay less attention to the prices of assets and more to the income they generate”. Just because IBM stock is down 20% doesn’t mean they’re earning less profit for their shareholders—or more importantly that your dividend income will be affected.
During this low interest rate environment, Sommers Financial Management developed “annuity alternatives” that we call Sustainable Income Portfolios (SIPs). They are designed with the aim of regularly taking the inflation-adjusted income from your investment portfolio, without eating away at the principal over time.
While the principal value of your portfolio will fluctuate with the market, it should not affect the income produced by the holdings. We know from history that markets tend to rise over time (even with some down years), so we are betting that the portfolio will maintain principal throughout your golden years. We’ve built SIPs fit for conservative investors, moderate investors, and aggressive investors—and they all generate annual income payouts between 4.3% and 4.7%, not accounting for a rise—or occasional decline—in principal.
We encourage you to “SIP income from your investments”. Our Sustainable Income Portfolios [SIPs] are designed so that you can have your cake—and nibble from it, too!