By: FPA Member Jason K. Branning, CFP®
Last Updated: April 23, 2012
Designing a retirement plan can feel overwhelming. Retiring is one of life’s most significant transitions and should be entered into through careful planning. Retirees should start by deciding how to replace their needed income. Base Income should be matched up against your Base Expenses1 (essentials – food, housing, medical, transportation, etc.). Base Income should be secure, stable, and sustainable.2
Since no individual knows how long they will live (their own personal longevity), Base Income should be created from sources that are paid over lifetime – however long that is. This article is aimed at offering you some viable approaches to income planning for your unknown lifetime.
In this context, here are a few options you may consider as viable when creating your Base Income streams and a brief summary of each. Deciding when and how to use any of these are beyond the scope of this article, but there are ways to maximize or optimize any of these options when creating an individually secure retirement Base Income Funding strategy.
Social Security may represent a significant strategy in your overall retirement plan. Steve Goss, the chief actuary of Social Security was recently interviewed by Reuters.3 Here is how he described maximizing Social Security benefits:
Q: …Is there a way for people to "buy" more Social Security than they could otherwise get?
A: There's one way to do this that is discussed extensively. Social Security uses a formula called the primary insurance amount, or PIA. If you wait to start receiving Social Security until your Full Retirement Age (FRA), you get 100 of your PIA. If you take it at 62, when you first become eligible, you get only 75 percent. But if you wait until age 70, you get 132 percent of the PIA.
From 75 percent to 132 percent at 70 - that is close to a doubling of the monthly retirement income that you can have for the rest of your life. What's key on this is that Social Security is one of the few providers of a true inflation-indexed life annuity. So if people who do have some savings would use those assets to push back the date that they file for Social Security benefits, they can, in effect - easily and at a very good rate of return - "buy" a CPI-indexed life annuity.
Traditional pensions, while diminishingly scarce in the marketplace offer lifetime guaranteed income. All pensions are different, some offer cost of living adjustments, while others do not.
Low-cost Variable Annuity with Guaranteed Living Withdrawal Benefits (VA/GLWB)
A low-cost variable annuity with guaranteed living withdrawal benefits offers many the peace of mind to have some market exposure with some protections. Income “withdrawals would reduce the account balance in the VA, and, if the account were depleted (by long life or poor investment performance), the guarantee would kick in and payments would continue for life.”4
The goal of this annuity structure is to try and use the stock market to help stay ahead of or with cost of living increases, while paying for some insurance on your future income if the market does not perform well. Also, please note annuity vehicles have special tax implications to consider.
Deferred Income Annuity (DIA)5
Deferred Income Annuities are relatively new, but may provide another means of guaranteeing retirement income. Retirees pay an insurance company a specific amount of money today, and in a stated number of years the insurance company promises to deliver a monthly income check for life.
Single Premium Immediate Annuity (SPIA)
Unlike DIAs which promise income in the future, SPIAs are a traditional annuity structure. Retirees pay a sum to an insurance company now and the insurance company pays a monthly check for a stated period or over lifetime.
All of the above listed options have opportunity costs, tax implications, and pros and cons that should be evaluated based on your individual situation. While there are many helpful tools online, hiring a CERTIFIED FINANCIAL PLANNERTM practitioner from the Financial Planning Association (FPA) will enable you follow a multi-step process that comprehensively examines your retirement goals, needs, and will inform you of your ability to meet these based on your total assets and retirement income. If you are thinking of retirement, contact a qualified financial advisor from FPA today.
FPA member Jason Branning, CFP®, is a fee-based investment adviser and financial planner with CS Planning Corp. in Ridgeland, Miss. He owns Branning Wealth Management LLC. www.branwealth.com.
1. Base Expenses, as defined by Modern Retirement Theory, are mandatory living expenses of food, shelter, clothing, medical, transportation, and utilities.
2. The 3-SModel which is secure, stable, and sustainable is a premise of Modern Retirement Theory. “Modern Retirement Theory”, Journal of Financial Planning’s Retirement Distribution Supplement, December 2009. Copyright Jason Branning and Ray Grubbs.
3. “How to get the most from Social Security”, Mark Miller. Retrieved from: http://www.readability.com/read?url=http%3A//finance.yahoo.com/news/most-social-security-180219632.html on 4/17/2012
4. “Flexible Strategies for Longevity Protection: Comparing Two Products” by Joe Tomlinson. Advisor Perspectives. April 10, 2012. Retrieved on 4/19/2012 from http://www.advisorperspectives.com/newsletters12/pdfs/Flexible_Strategies_for_Longevity_Protection.pdf
5. “How to Create a Pension (With a Few Catches).” Anne Tergesen. Wall Street Journal. Retrieved on 4/9/2012 from http://online.wsj.com/article/SB10001424052970204571404577253853314354494.html