YOUR RETIREMENT
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Editor's note: This article is adapted from Kiplinger's Retirement Planning 2008 guide. Order your copy today.
With the first wave of baby-boomers on the verge of retirement, there is escalating emphasis on helping retirees turn years of savings into a stream of income that they can't outlive. With more than $16 trillion in retirement savings nationwide, the stakes are high.
Retirees have traditionally relied on guaranteed lifetime income from pensions and Social Security. But these days, your retirement nest egg is more likely to be a lump sum -- either a one-time distribution from a pension plan or accumulated savings in a 401(k) or IRA. The challenge is to invest your money so it grows enough to last throughout what could be a 30-year retirement. In addition, you must figure out how much you can withdraw each year without running out of money.
In effect, the challenge is to create your own pension. But luckily, the financial-services industry is stepping up to the plate with an array of new solutions.
"Retirement-income products are the next big thing," says Jim Peterson, vice-president of the Center for Financial Research at Charles Schwab. "We're going to see lots of new products with new twists." Although there's no single investment solution to manage all of your retirement income just yet, several new options can help you construct a plan that works for you.
Two mutual fund giants -- Fidelity Investments and the Vanguard Group -- recently unveiled a new class of funds that manage your assets and provide a retirement income stream. Meanwhile, the insurance industry is reworking immediate annuities to meet the demands of aging baby-boomers.
Maximize your payout
If you're looking for the maximum amount of income for a specific period of time, one of the 11 new Fidelity Income Replacement funds may be appropriate for a portion of your nest egg. You choose a mutual fund with a target date -- currently from 2016 to 2036 -- and receive monthly payments until that year, when the fund is exhausted. Your payments are set for one year at a time and can rise -- or fall -- in subsequent years, depending on market performance.
Because of the preset time frame, payouts from the Fidelity funds can be larger than the recommended withdrawal rates for retirees who have to stretch their money over a lifetime. Generally, retirees are encouraged to withdraw just 4% of their nest egg the first year, and to increase the dollar amount to adjust for inflation in subsequent years. So if you have $500,000, you would withdraw $20,000 the first year. Assuming 3% inflation, you would take out $20,600 the second year, and so on.
But money you invest in the Fidelity funds will be depleted by a preset date, so you don't want to put all of your savings in one of these funds. Instead, such a fund would work well as an income bridge or to cover specific spending needs, such as a travel budget. The longer your time horizon, the smaller your initial payout rate will be.
Say you're 55, work part-time and plan to collect Social Security at 65. You could use Fidelity's 2018 Income Replacement fund to supplement your income for the next ten years. The initial payout rate of the 2018 fund is 9.58%. So if you invested $200,000, you would receive $19,160 the first year, spread out over 12 monthly payments.
The payout rate would gradually increase to 100% of the fund's balance in the final year, but the actual dollar amount could fluctuate from year to year. For example, had the fund been available during the three-year bear market that started in 2000, your monthly payment would have dropped from $1,597 the first year to $1,412 by 2003, according to an analysis by Morningstar. If the market performs well, however, your payouts could increase each year.
Or say you and your spouse are both 65 and would like some added income to supplement your pension and Social Security benefits. If you invested $200,000 in the Fidelity 2026 Income Replacement fund, you would receive a 6.5% payout, or about $13,000, the first year, with the possibility of higher payouts in subsequent years until the assets were exhausted 18 years later.
But don't tie all of your assets to your life expectancy. Although the median life expectancy for a 65-year-old is 83, half of that age group will live longer. If you're one of them, you could be out of luck if your funds expire before you do.
Although the Fidelity Income Replacement funds don't offer guaranteed income for life, they offer plenty of flexibility. You can stop payments, switch funds to shorten or lengthen your payout schedule, or withdraw all your money at any time -- without paying a fee. "We've created a vehicle that allows you to change your plans on the fly," says Jonathan Shelon, co-manager of the funds.
POSTED BY: Bruce (July 01, 2008 07:31 PM)
On size doesn't fit all. Most of these products work best in combination with other products. A good but conservative retirement plan will include CD's, Mutual Funds, an immediate annuity, and Long Term Care Insurance. Just Remember, a Banker will try to sell you CDs; A Stock Broker will try to sell you mutual funds; An insurance Agent will try to sell you an annuity.
POSTED BY: Jay (July 08, 2008 02:09 PM)
The secret is to diversify and save during the working years: Roth, 401K. And buy several individual TDSP annuities that each have many options for payout if needed at various points during the retirement years.
POSTED BY: Dave (July 15, 2008 11:58 PM)
Do the math, the Fidelity vehicle for example pays 1.7% annually.
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