Providing a Lifetime Retirement Income?

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My wife and I enjoyed wonderful holidays with our extended family. It was great to catch up with them and hear about their lives. We briefly spoke about their retirement income. They said that as long as they earn an average 8-9% return, their money will last forever. This reminded me of the fact that many retirees rely on their stockbroker for help in outperforming the stock market over their 20-plus years of retirement. Maybe they will. Even if they have a broker that is capable of outperforming the stock market, there’s still the risk of running out.

Let me explain. Over the years I’ve seen many retired couples approach me for financial assistance because they are short of cash. Example: In 1992, one of these couples was able to retire with just over a million dollars. They were living on $70,000 per annum, and they had less than $176,000. They had run out of money and weren’t sure what to do. They were assured by their investment broker that they would get an average return of 8 to 9 percent on their retirement funds. They didn’t receive that return every year, even though they had an 8 to 9 percent return on their retirement portfolio. There were years when they earned less than 8-9% and years when they lost money. They still had $70,000 in income each year to sustain their lifestyle. You are increasing your investment losses if you withdraw income from your retirement portfolio during years of low returns or losses.

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They were also paying management fees each year to their broker regardless of whether or not their retirement portfolio was successful. If you have an average return of 8 to 9 percent and pay a management fee of 2%, isn’t that your net return only 6 to 7 percent per year?

They lost more than 40% of their remaining funds when the stock market plunged in 2000-2003. This was the final straw. They couldn’t recoup their losses, and they needed the income. Therefore, they had to take out a reverse mortgage to finance their home. This forced them to drastically cut back on their lifestyle and look to their children to help. This is a common story.

The question is: Will your clients run out of money? Even after the correction in the stock market at the turn of this century, I recommend that retirement savers exit the stock market using the income they earn. The stock market is overpriced, I believe. Stock prices are still higher than normal when you consider the price to earnings ratio, dividend yields, relative strength, and other factors.

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Why is the Market So Overpriced
The 90s stock market was overvalued due to many factors, including new technology, a declining interest rate, and an undervalued US Dollar. One of the main reasons for the overvalued stock market in the 1990s is the fact that many Baby Boomers, trying to make up lost time, funneled their entire retirement savings into the stock exchange within a short period of time. The stock market’s prices rose dramatically in the 1990s due to this.

We saw a substantial price correction between 2000 and 2003. The FED maintained extremely low interest rates during and after the market correction so there was no other place these Boomers could invest their money to earn decent returns. Many Boomers left their money in stock markets as they were unable to find better investments. This prevented the stock market from correcting completely.

Even if the stock market isn’t overpriced at the moment, there is no doubt that we will see unprecedented retirements in the coming years. What will happen when more people liquidate their investments each year to generate an income? Will we see sharp drops in stock market prices or lackluster returns if more money is taken out than is being invested? We may never know. However, it seems unlikely that you will see an average return of 8-9% over the next 10 years. This is just wishful thinking.

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How can you make your clients’ money last?
There is no one investment strategy or income generation strategy that works for every retiree. Each retiree’s situation is unique. Annuities can be used to income ladder with a portion of your money. This will allow you to have a longer-lasting income with less risk. There are also no fees. Annuities tied to the Stock Market Index such as the S&P 500 are another option. These annuities that are equity-indexed can offer retirees the upside potential of stocks without the downside risks.