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DeVol Insurance & Financial Services |
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A Simpler Strategy ...
There are basically three approaches to taking withdrawals during retirement:
Flooring Approach
This concept has the advantage of simplicity, but suffers from some serious drawbacks in its purest form. You build a budget separating those expenses that are absolutely necessary. Those that spring to mind are: |
- your basic healthcare (including Medicare and Medicare supplement premiums, dental bills, and an allowance for expenses not covered by any plan),
- groceries, and
- housing (including rent or mortgage, and utilities).
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Readers of our newsletter will know that we promote the many virtues of delaying your reception of Social Security benefits.
By delaying, you are buying government-subsidized longevity insurance -- that is, insurance against living too long. This strategy particularly benefits the female spouse who is actuarially expected to outlive her husband.
Click here for more info.
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Then you arrange to pay for these with guaranteed or very dependable products. These could include the following: social security, a bond portfolio, a fixed immediate annuity
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(preferably with an inflation rider). Then for the discretionary expenses, those which you could forego if you had to, you take systematic withdrawals, as we discussed in our last newsletter.
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For example: |
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After-tax Expenses
$60,000/year-Essential |
Covered by:
$40,000 Social Security
$20,000 Paid by a fixed annuity | |
$20,000/year-Discretionary
_________________________ |
$20,000 Systematic Withdrawal
__________________________ | |
$80,000 |
$80,000 |
The biggest advantage to this approach is its simplicity, along with certainty at a time in life when we have a low tolerance for uncertainty. The problem, though, is that obtaining that kind of security can be expensive, especially in this low interest rate environment. After all, insurance companies aren't making any more money on their bond and guaranteed interest portfolios than the rest of us are. So, the $20,000 fixed annuity
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above might cost $500,000.
Another disadvantage is: what is discretionary? Most people look upon their present lifestyle as essential and would find it very difficult to live comfortably on 80% of what they are presently spending. The most that we can conclude is that having a portion of your expenses paid by guaranteed sources is very attractive. After all, this is what pensions used to do and still do today for some lucky folks!
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 Thomas Phelps DeVol is the founder of DeVol Insurance & Financial Services. His focus is on retirement income planning. He enjoys listening to his clients' ideas about their plans for retirement and helping them transform those ideas into an attainable plan for the future. His persistence and diligence are the keys to his success - and that of his clients.
Tom has three children and lives with his wife, Connie, and their two younger children in Newton, Massachusetts. He enjoys gardening, tennis, biking, and opera.
Tom can be reached at 617-964-6404 or via email.
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Securities offered through Sammons Securities Company, Member FINRA/SIPC. Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment adviser. DeVol Insurance & Financial Services is not affiliated with Sammons Securities Co.
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