As clients get closer to retirement, the sequence of return risk looms larger. Since the market has hit recent highs, perhaps they consider taking some off the top to protect their bottom? Below are three safety net strategies for a 60-year-old couple retiring in 5 years.
Buy time and peace of mind with planned income
Uncertainty causes concern, and today there are many unknowns. A 60-year-old couple wanting to retire in 5 years with the intent to defer social security until 70, may want to lock in that income today. If they set aside $435,000 today, in 5 years the deferred income annuity will start paying $10,000 per month for 5 years, guaranteed. This protects their retirement start date, knowing they will have the income they need and have time to recover if the market dips significantly along the way. This idea works best with non-qualified assets, especially cash because a larger portion of the income is a return of principal and not taxable for those 5 years.
For those needing more flexibility in their planning, a 5-year guaranteed fixed rate annuity from a highly rated insurance company is currently paying over 5% and can protect their principal along the way.
Sequence of Returns Comparison
Assure them they won’t run out of money
Another way to instill confidence and stay more fully invested is to put a QLAC safety net under them. If a 60-year-old married couple sets aside $200,000 from their IRA, they can guarantee income down the line. Below is a grid reflecting age 80 and 85 income start dates. The return of premium (ROP) rates guarantee their principal back if they both die before reaching the income start age.
Launch the following link to learn more: Integrated Insights™ – DIAs & QLACs
Minimize the monkey wrench of chronic care
There is certainly debate about what asset level is sufficient to “self-insure” for an extended care event, especially for married couples. For couples on the lower end of the net worth spectrum there is an option that can protect and leverage their assets into a death benefit they can access if care is needed.
This product provides a death benefit when the second spouse passes. Having this in place allows you to access the tax-free death benefit if care is needed for the surviving spouse or when needing care simultaneously. Whatever is not used for care goes to the heirs. Later in life, it may be considered a permission slip to annuitize assets if the drawdown rate becomes too high and they risk running out of money.
A single premium of $200,000 will guarantee a death benefit of $788,000 to age 100. If care is needed, they can draw 2% of the death benefit each month, capped at the IRS HIPAA per diem (currently $410/day or $12,300/mo). If the second death occurs at age 90 the IRR on the death benefit is 4.5%, and if death is at 95 the IRR is 3.9%. These are net yields and would need to be grossed up by a management fee and taxation when compared to investing.
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