Retirement: Having your cake and eating it, too
When it comes to a strategy for developing retirement income from savings, most people want to have their cake and eat it, too. They want access to their savings and the ability to leave unused funds as a legacy. Yet they also want a guarantee of lifetime retirement income, no matter how long they live.
Unfortunately, you usually have to decide how you'll trade off between these two goals:
- With systematic withdrawals, you'll have access to savings and the ability to leave a legacy, but you won't have a lifetime guarantee.
- With traditional immediate annuities, you'll have a lifetime guarantee of income, but you won't have access to savings or the ability to leave a legacy.
Of course, one way to meet both goals is to devote a portion of your retirement savings to a traditional immediate annuity and devote the remainder to systematic withdrawals.
But recent regulations on qualified longevity annuity contracts (QLACs) give you another option. You can devote most of your savings to systematic withdrawals to give you access and legacy potential with that portion of your savings. Then, with the remainder of your money, you can buy a QLAC to give you a guaranteed lifetime retirement income starting an advanced age, such as age 80 or 85.
Let's look at one example to see how "do it yourselfers" could implement such a retirement income strategy. We'll assume a married couple, both age 65, want to retire at that age and start generating retirement income from their savings. We'll also assume they have $500,000 in retirement savings that they can devote to generating retirement income. And last, they've also set aside additional funds for emergencies that they won't use to generate retirement income.
So, they invest $425,000 in Fidelity's Income Replacement 2034 Fund, which would invest their savings in a mixture of stocks and bonds, and systematically pay them a monthly income with the goal of exhausting these savings by 2034, when they reach age 85. With this portion of their savings, they have access to their money, and any unused funds at their death are available for a legacy.
The payout rate changes each year with this fund to adjust for investment gains or losses, and to make course corrections as the target year approaches. With the current payout rate, $425,000 in savings would generate a monthly income of about $2,186.
They would then use $75,000 of their savings to buy a QLAC that would start at age 85, payable for as long as one of them is still alive. Using a recent quote from Income Solutions, their monthly income at age 85 would be about $2,162, close to the income they received before age 85 from systematic withdrawals. This portion of their savings is locked up and isn't available for emergency withdrawals or a legacy, but that's not a problem because they still have access to the bulk of their retirement savings.
This example shows just one possible combination using systematic withdrawals and a QLAC. If this couple is worried about inflation in their later years, they might devote more savings to the QLAC and less to systematic withdrawals. For example, if they invested only $400,000 in the Fidelity Income Replacement 2034 Fund and put $100,000 in the QLAC, their monthly income before age 85 would be about $2,057, and their monthly income after age 85 would be about $2,882.
Another, more conservative approach might be to use a low-cost target-date mutual fund for systematic withdrawals and then withdraw according to the IRS's required minimum distribution rules. The initial annual payout rate at age 70-1/2 is 3.65 percent, resulting in an initial monthly income of about $1,293 if they invested $425,000 in such a fund. They'd be free to withdraw at any rate up to age 70-1/2.
However, this would result in a lower retirement income before age 85, compared to using the Fidelity 2034 Fund, but they could work part-time during this period to help supplement their retirement income. They would also still have assets remaining at age 85, unlike with the Fidelity Fund that has the goal of exhausting assets by the target date.
As you can see, developing a retirement income strategy is part art, part science. You'll do the best for yourself by learning about your options before making a decision about investing your retirement savings. That will help you choose wisely.
