Jealous of all your friends with huge pension plans?
You have good reason! In many cases, even if they lose all their retirement savings, they still have enough income to cover a decent retirement lifestyle.
The rest of us may need to consider setting up our own
personal pension plans to "put a floor" under the cash flow required for our basic retirement needs.
Although I'm a believer in the long-term wisdom of a balanced investment portfolio, I also realize the peace of mind annuities and guaranteed lifetime income plans provide.
We didn't hear much about annuities over the past few decades, but they are gaining popularity now that so many boomers are in the retirement risk zone - when low interest rates and a bad downturn in the markets can seriously affect the ability of a portfolio to produce a healthy retirement income.
Annuities actually have a history dating back over 2,000 years. Contracts during Roman times were known as annua in Latin, or "annual stipends". Roman citizens would make a one-time payment to the annua, in exchange for lifetime payments made once a year. That concept closely resembles the payout annuity offered today.
Essentially, this is the reverse of life insurance. With life insurance you hope that the insurance company collects your premiums, wins the bet and doesn't pay out. With an annuity though, you hope the insurance company loses the bet and pays out for a long, long time.
An annuity is a "fixed income" investment though and that warns us by its very name. This will be dangerous when rampant inflation rears its ugly head again.
An available index feature will increase your income each year, but your earlier payments will start off much lower.
Just like a pension plan, annuities can be arranged to provide continuing benefits for a surviving spouse, but they do not usually leave a lump sum estate benefit.
One compromise to this problem is the guaranteed minimum withdrawal benefit plan, or GMWB for short. It is a hybrid between an annuity and a segregated fund and offers a guaranteed income for life with the potential for growth in its market value.
Resets in income to combat inflation may apply if the market value rises above a certain threshold every few years. The market value remains available in case of emergencies and for the benefit of the estate. However, extra withdrawals will compromise future income.
The real magic of guaranteed retirement income happens when your head hits the pillow every night. A good night's sleep can be priceless!
Richard Vetter, BA, CFP, CLU, ChFC, is a certified financial planner and owner of WealthSmart Financial Group. Follow @ wealthsmart on Twitter.
