Do you fear reaching age 75 or 80 and having no way to generate the money you need to live on?
This is a legitimate fear, especially if you don’t have a so-called gold-plated pension plan.
No one wants to be in that scenario.
And there is no reason to be: there is actually a way that you can create your own pension plan, with guaranteed income for life.
No matter what happens to the market, you will get a certain amount of income every single year.
You don’t need a government contract or a big corporate pension plan.
Recently, a client came to me with this exact fear. She was nearing retirement age and was concerned that even with her husband’s pension and her other investments she would outlive her money.
She was also exceptionally risk averse. She had been burned by the market – and other advisors – before. She had lost a large chunk of her capital investment and was not eager to do so again. She had one major, overarching criterium:
“For the love of all things, I cannot lose this money.”
She had $600,000 of unregistered money that she wanted to invest, but she absolutely could not afford to play the market with it and risk losing. She needed no risk and was willing to pay a higher fee for that.
I suggested she purchase a guaranteed minimum withdrawal benefit (GMWB).
How does a GMWB work?
1. Deposit a lump sum of money.
Before you retire, you purchase the GMWB product through a financial advisor. For my client, this purchase was $600,000.
2. Your guaranteed income amount is set
You are guaranteed to receive a set percentage of your deposit for life, and the percentage is based on the age you start withdrawing. For example, if you start withdrawing income at age 65, you are guaranteed to receive 4% of your initial investment for life – no matter how the market performs or what age you live to. This amount can increase, but it will never decrease.
For my client who is 59, that meant that she was guaranteed approximately $20,000 per year right out of the gate. The market could crash and burn the next month, and she would still get $20,000 per year until she died.
3. Increase your guaranteed income amount
For every year you do not make withdrawals, you will receive a bonus – the current rate if you enter into a contract today is 4%/yr of your initial investment. That bonus is added on to the base amount used to calculate your guaranteed income. So instead of your guaranteed income being 4% of your initial investment, it becomes 4% of your initial investment plus the bonus for ever year you defer drawing income.
For my client, that meant that after deferring the first year, her guaranteed income would be 4% of $624,000 = $1,400 more than when she initially invested.
Even once you start making withdrawals, every 3 years (called the “Anniversary Date”) your investment is evaluated. If market value is higher than your initial investment, this higher value is locked in and becomes the new base on which your guaranteed income amount is calculated. If the market value is lower? Nothing happens. Your guaranteed income amount will not decrease.
You will always benefit from a market increase, and never suffer from a market downturn.
4. Start making withdrawals
As you withdraw, the market value of your investment decreases, but your income amount does not.
5. Your beneficiaries receive the market value of your investment.
Your beneficiary will either gets the market value or 75% of last “Anniversary Date” amount less any withdrawals, whichever is higher. Compared to an annuity, this is a great advantage where typically the funds end on death.
My client was planning to wait 8 years before needing to withdraw from this benefit. That would mean she would be guaranteed about $32,000 per year of income, regardless of market performance (we illustrated -2% rate of return every single year just for fun). Her entire principal investment could be eroded (and it would be at that rate), and she would still receive $32,000 per year. What’s even better is if the market plays nice, she benefits - if she gets her expected rate of return of 6%, she will receive about $38,000 per year until she dies.
In fact, with a GMWB she would actually be able to withdraw about $1,064,000 in her lifetime despite only investing $600,000 initially if she lives until age 95. And she would never have to fear a market drop.
In other words: she would never outlive her money.
Are you concerned that you or your parents will outlive your money? Book a call with me to discuss how we can eliminate that possibility for good.