www.herald-journal.com
Forget the markets; base your retirement on math
November 5, 2012
by Brian Wolf

In the recent presidential debates, both candidates have been trying to sell you on their ideas. And one of the ways they have been doing that is by played the “math card.” What this all boils down to is that people process information differently.

Some people are moved to action by emotion and others by logic. So when a candidate is telling a story they are going after the people that process information emotionally. However, when they talk numbers and math, they are trying to relate to the folks that process more with logic. No right or wrong here, just different approaches. All sales are done this way. It doesn’t matter if you’re selling widgets, cars, insurance, houses, or political ideas.

So today I’ll take the lead from the campaign and play the math card also.

One idea that has been coming up with great frequency lately is the idea of basing your retirement income on math, and not on markets. In other words, your retirement income should not rely on market performance but instead, it should simply be the result of mathematical calculations.

Sounds like a good idea, but how does it work in practice? To best illustrate this, let’s use an example.

Imagine a 55-year-old with $250,000 in their IRA. They want to retire in 10 years (at age 65) and then use their IRA to deliver retirement income.

Question: how much income can this person expect to receive from their IRA when they retire in 10 years?

Answer: no idea! A big part depends on what return they get in their IRA over the next 10 years which is completely unknown.

In the 1980s and 1990s, you might expect to get 10 percent per year and perhaps more. In the 2000s, you may have gotten a big fat 0 percent return. What about future possibility of a negative return? You can see the problem here. So what should our hypothetical investor expect for the next 10 years? It’s a complete roll of the dice, which makes retirement planning next to impossible.

But what if you could predict with pinpoint accuracy today exactly what that IRA will produce in retirement income 10 years from now? What if you could guarantee the equivalent of earning 10 to 12 percent per year over the next 10 years? Would that be helpful?

Obviously, this would be a huge benefit to those saving for retirement. But how is that possible?

The answer comes in the form of Private Pension Plans. These plans are issued by insurance companies and funded by annuity contracts with lifetime income riders. *

The 55-year-old person in our example could deposit their $250,000 into one of these contracts today and have a guaranteed lifetime retirement income of over $29,000 per year in 10 years. To duplicate this outcome in the market, you would have to earn 11.32 percent per year over the next 10 years.

What do you think the odds are that you can beat 11.32 percent over the next 10 years? Pretty small, I’d guess.

These plans base your income on math. Isn’t that a lot better than basing your income on the markets?

*Disclaimer: Guarantees are based on the claims-paying ability of the issuing company. Information and descriptions of products and services are provided solely for general informational purposes and are not intended to be complete descriptions. Policies contain exclusions, limitations, and restrictions. For complete details of limitations and restrictions, the actual policy should be consulted.


Advertise in over
250+ MN newspapers