4 Ways to Reduce the Probability of Running Out of Money in Retirement

 

Troy Sharpe: A study by Allianz Life Insurance Company said that three out of four retirees fear running out of money more than dying. This video is going to show you four ways that can help you reduce the possibility of running out of income in retirement.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, author of the upcoming book Core4, certified financial planner professional, and host of the Retirement Income Show. If you have a concern about running out of money in retirement or if you’ve ever laid in bed tossing and turning wondering where your income is going to come from, I want you to comment down below that, “Yes, I’ve had a concern about running out of income in retirement,” or, “No, I don’t worry about it. I feel like everything is going to be okay.”

The first way to help avoid running out of income in retirement is to  consider the impact of when you elect Social Security and if you do have a concern, deferring Social Security until later in life can help provide more  income guaranteed for life. I want to show you a quick analysis. This is a chart that shows the total benefits of Social Security income received if you defer until age 70 versus taking it early at age 62. This is a husband and a wife. Husband is 65, the wife is 62.

If they defer taking Social Security, they’re going to receive on a long life expectancy over $2 million in income from Social Security versus if they take it early $1.5 million. That’s almost $500,000 in more income from Social Security by deferring if you have a long life expectancy. If you have a short or, excuse me, a normal life expectancy, it’s $1.5 million, $1.497 million versus $1.1 million.

Deferring Social Security if you are concerned about running out of money can put hundreds of thousands of extra dollars in your retirement pocket. That’s a solid way to increase your income and help avoid running out of income. The second way is to consider investing a portion of your retirement savings into what we call a deferred income annuity.

If we take a couple, same couple, 65 years old husband, 63-year-old old wife with a million dollars saved for retirement, if they take $250,000 and put it into a deferred income annuity with plans of taking income in 10 years, that’s going to provide them roughly $30,000 a year. Some companies will guarantee $28,000, some will guarantee $32,000, so this is just an estimate. That’s about $30,000 per year every year for the rest of their lives no matter how long they live. From 75 to 85, that would be $300,000 of income.

From 85 to 95 an additional $300,000. Your initial deposit of $250,000 would guarantee over $600,000 in potential retirement income. No risk to your principal, fully guaranteed. An excellent way to use a portion of your money to make sure you have a guaranteed lifetime income stream to combine with social security. Let’s look at it. We have a 65-year-old husband, 62-year-old wife, Social Security for them if they defer it to 70 and 67 would be $4,700 a month.

Now, Social Security increases with what we call cost of living adjustments. Some years it goes up 1%, 2%, 3%, some years it doesn’t, but Social Security is supposed to keep up with inflation. $250,00 in a deferred income annuity guaranteeing about $3,000 per month for life. In the first few years of retirement here, instead of taking Social Security, their other $750,000 would simply withdraw to meet the income needs earlier in retirement. Once we hit this point, we don’t need to take from savings anymore, we take from Social Security.

Assuming you have about a $5,000 a month retirement budget, maybe you need to supplement that a bit more from your savings, but when the deferred income annuity kicks in, that’s an additional $3,000 per month, $600,000 over the next 20 years. At 75 and 72, this couple would have $7,700 per  month in guaranteed lifetime income, so come heck or high water those paychecks are going to be deposited every single month in their bank account to help them ensure that they always have a paycheck for the rest of their lives.

Now, keep in mind the other $750,000 of their other savings is still hopefully growing and invested and being managed properly. We call this flooring, making sure that you always have a floor of a certain amount of guaranteed lifetime income, so those paychecks they come in every single month like clockwork. That can help provide confidence and security and peace of mind knowing that those paychecks will be deposited every single month.

Third way to help ensure that you do not run out of money is to have a tax plan. I had a couple come in here recently and they said, “Troy, I’m scared to death that taxes are going to be a lot higher in the future.” On the first visit, we get to know them, we get to know what’s most important. In their case, it was taxes. During the first or between the first and the second visit, our team did a tax analysis for them and came up with recommendations for a tax plan.

For this couple, they also had about a million dollars saved for retirement. The difference between having a tax plan and doing what their current advisor was telling them to do would have cost them potentially $500,000 in additional taxes paid. This is the cumulative taxes column in their tax plan. Their current advisor had them paying over $1.1 million in taxes if they would’ve followed their advisor’s recommendation for a retirement income.

We did a simple analysis here and found out that somewhere between $494,000 and $523,000 would be the estimated tax liability over the course of their retirement if they did it a different way, if they had a tax plan. This is a difference of more than $500,000 in less taxes paid simply by having a tax plan, so very, very important.

The fourth way to help avoid running out of money is to use what we call the Core4. The Core4 is a strategy that we use that helps our clients have multiple streams of income. You want to have multiple streams of income coming in retirement. When you put some money here and you put some money here, and you have some money here, you do the right thing with social security, you have a tax plan, now all of a sudden, we have multiple streams of income coming in, and we don’t like any of them to be tied to the performance of the stock market.

Our number one goal is to protect and to preserve our client’s money. One of the ways we do that is helping to generate income from multiple sources. We like to see five different sources of retirement income not tied to the performance of the stock market. If you liked this video, make sure to hit the subscribe button down below. If you hit the bell icon, that’ll notify you when we upload additional retirement content, which is going to help you stay more connected to your money.

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