On the verge of retirement?

  • Chris Everett

    Chris Everett

Posted11/7/2019 1:00 AM

Are you on the verge of retirement or selling your company? Consider this to help you get set up securely for retirement.

First of all, get perspective. Mary has an appetite for risk. In her core, she never felt financially secure, even though she and Bill, her hubby had collectively saved well. Turns out she'd lost quite a bit of her wealth in a partnership a few years ago. She got back on her feet and built the business again but wants out sooner than later. Conservative husband, Bill wants to know if they even could retire in the next three to five years.


We needed to get a handle on their income and expenses as well as look at actual accounts. Armed with good intel, I crunched the numbers to learn they could retire and can take far less risk than Mary thinks.

Secondly, know how much income you can count on. They want about $85,000 year which increases to cover inflation.

They will need about $1,000,000 and currently have $750,000 saved. They have time and income on their side in order to get there.

Mary planned to withdraw 4% per year or $40,000 from their investments. Mary was living under the old 4% rule assumption that has been debunked and reduced to about 2.5% due to market volatility. Nonetheless, that strategy does give her control, liquidity and asset flexibility with potential opportunity for more gains. However, she needs to also consider those assets are unprotected and exposed to market risk and sequence of returns risk. A series of negative returns could jeopardize their retirement. This makes the possibility of outliving their money a very real issue. Plus, to increase withdrawals over time, they would need about a 6% net rate of return each year.

On the other hand, Bill wondered if buying an annuity made any sense. In fact, it would, especially if they used a fixed indexed annuity for a portion of their nest egg to generate income.

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Here's why.

A fixed indexed annuity, commonly referred to as an FIA, provides protection from market losses. Bill loved that. It offers tax deferral, potential for credited interest based on positive changes in an external index. He loved not being all in the market. There's a death benefit in some cases, guaranteed income for life with (or without) cost of living increases. He liked the sound of that.

The downside of placing some of your money in an FIA, however, is less control, liquidity and asset flexibility for a period of time. That's because FIA's have a surrender charge and market value adjustment if surrendered too early. So, they need to buy one from a very strong carrier that fits their circumstance. Another factor, especially for Mary is that an FIA may have less growth potential than a solo market strategy -- though that's not historically always true. An FIA will have certain caps and participation rates that can limit returns.

I showed them a 70% market/30% FIA allocation. This allocation reduced the risk and subsequent return needed in Mary's market-based portfolio to just about 2.5% net annual rate of return. That's a far cry from needing to generate a net annual 6% return. This takes the pressure off their portfolio to produce lifetime income. Any overage the portfolio creates can be saved for their long-term care expenses.

70% Market Portfolio: $24,000 annual withdrawal from their market-based portfolio -- more if needed.

30% Fixed Indexed Annuity: $16,000 guaranteed annually for life.


The balance from Social Security benefits.

This combined approach is more efficient because it requires a lower rate of return and reduces the overall risk of outliving their money. Mary also gets to maintain the flexibility and potential growth of their market-based account and will take less risk. Because Bill doesn't know how long they will live, he is comforted by the guaranteed income for life.

They're happy and I love what I do!

• Chris Everett owns Everett Wealth Solutions, Inc., a registered investment advisor in Forest Park, IL.


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