The solution
Address these risks with a portfolio consisting of investments, life insurance and income annuities.
Investments provide necessary liquidity and growth, while the combination of permanent life insurance and income annuities introduces actuarial science to the planning and can lead the individual portfolio to perform more like a defined benefit plan.
How it works
One can take a portion of retirement assets and purchase a single premium immediate annuity at retirement. This will generate guaranteed lifelong income that will cease at the annuitant’s death.
Returning to our example, if Sue lives for 35 years she continues to receive income payments every month. But what if Sue dies in 10 years? That doesn’t seem to be a compelling value.
That is where the life insurance comes in: If Sue owns life insurance, then although the income ceases, the life insurance death benefit pays out to her beneficiary. The combination of permanent life insurance and income annuities creates “actuarial bonds.”
This solution can be used by many pre-retirees to prepare them now to employ this strategy when they reach retirement. Some studies show that maximum impact is created when one transitions into retirement with his or her life insurance already in place.
In many of these scenarios, people adopting the solution could increase their retirement incomes by 10%, 20%, or even more by deploying this strategy versus a traditional sustainable withdrawal rate approach.
But perhaps the biggest positive impact to people is the psychological benefit of knowing that short-term market fluctuations like those in recent months, or more sedate markets, will not cause them to run out of income, even if they live beyond assumed life expectancy.