Saved Enough for Retirement? That's Only Half the Battle

So, you’ve done, or are still doing, everything right. You’ve saved carefully and consistently throughout your career, and the fruits of your labor have produced a nice retirement nest egg. Congratulations … but that’s only one half of the equation. Now it’s important to ensure that nest egg provides you with retirement income for the rest of your life.

Ken Kamen, president of Princeton, N.J.-based Mercadien Asset Management LLC, and author of “Reclaim Your Nest Egg: Take Control of Your Financial Future” (Bloomberg Press), says switching from a savings to a spending mindset is not as easy as you might think.

“We spend our lives getting this affirmation that we’re throwing wood on the pile, and one of the things that really freaks people out is when they have to start taking wood off the pile,” Kamen says. “Going from an accumulator to a de-cumulator creates a lot of angst.”

Start with a Spending Plan

Kamen calls watching affluent individuals live reduced lifestyles in their later years “one of the biggest shames,” because they never develop that comfort level in transitioning from a saver to a spender. A spending strategy, or what Kamen calls “a retirement glide path,” is essential for instilling comfort and ensuring you’ll be able to sleep at night.

One of the key components to a spending strategy is setting aside a specific amount of money, your spending money, over the next two years, he says. For example, if you know you’re nearing retirement and you know you’re going to need $50,000 a year to supplement your income stream, you want to put about $100,000 into a liquid savings account.

“The object there is you’re putting that money into CDs or something that’s not going to be subject to a lot of market fluctuation, so you know that your income for the next couple of years is taken care of, so you can sleep at night,” Kamen explains. “Volatility is part of investing, and the definition of investing is managing risk. By segregating out that money, it allows you to look at things in a more objective basis.”

Kamen also says that, just as with savings, the time to start putting together a spending strategy is now. “If you want an apple today, when is the best time to plant an apple tree?” he asks, rhetorically. “The answer is, 20 years ago. It doesn’t matter what age you are. The younger you start, the better.”

Understanding Annuities

When the talk turns to guaranteed retirement income, one of the first things that come to mind is annuities. Annuities -- insurance products that guarantee income over a certain period of time in return for an upfront lump sum investment or series of payments -- can play an important role in an overall retirement plan, but too often there’s confusion over how they work, according to Tony Keena, IAR, AAMS, AWMA, RFC, a private wealth manager and partner with The Estate and Business Planning Group P.A. in Altamonte Springs, Fla.

“When you bring up the word ‘annuity,’ people think loss of control,” Keena says. “They think that when they die, the money will be gone.” Some annuities do indeed work that way, but there are newer products on the market that allow the individual to retain control, he says.

Keena says there are variable annuities that come with a guaranteed minimum income benefit (GMIB) rider. Not only do variable annuities provide a guaranteed income, but your heirs are will receive at least the initial deposit. “There are some policies on the market today where you can get 5 or 6 percent, along with a guaranteed return of principle to your heirs,” he says. “So, if I’m putting in $500,000 and taking 6 percent, I know that, worse case scenario, the 6 percent will be guaranteed to me for life, and my heirs will receive nothing less than $500,000. That’s very attractive.”

Another option is a fixed indexed annuity, which indexes off the performance of the stock market without being invested directly in the stock market. As such, it not only guarantees that you won’t lose your money, but it also affords the ability to earn a slightly higher return than a variable annuity. However, Keena says it’s important to understand how the annuity works.

“Some [products] say that their rider is 7 percent or 8 percent. Some are going as high as 10 percent. But, is it 10 percent compound or simple [interest]?” Keena says. “There’s a big difference. Ten percent simple is only 7.2 percent compound.” And once you start to pull income from the annuity, your heirs might not be guaranteed the minimum you put in, he says. Over a long period of time, that $500,000 could be reduced to just $300,000 for your heirs. “Does that make [the annuity] a bad product? No, but make certain you fully understand how it works,” he says.

You can learn more about the risks and rewards of annuities here.