Retirement Income Choices in Difficult Times

Advantages & Disadvantages: Investing for Income Choices

Choice

Advantages

Disadvantages

Periodic withdrawals from existing diversified investments

Possibly (probably) significantly less change than other choices

Withdrawals when an investment is down can lower probability of getting "acceptable" (joint) lifetime income.

Bonds- Individual Investment Grade

1. Bond issuer required to return principal at maturity
2. Very low historical risk of default
3. Therefore, very low probability of nominal loss of principal
4. Understandable (interest) income
5. Income known before purchase
6. Periodic known income e.g. 2X per year - until maturity
7. Low correlation with stock market when held until maturity

1. More difficult to buy than bond funds
2. Less practical for a D-I-Y (Do-It-Yourself) investor
3. Sometimes dollar minimums are restrictive
4. Historically lower return than stocks
5. Might not keep up with inflation

Bond Fund

1. Ease of use
2. Liquid every business day
3. Typically very low dollar minimums

1. Bond mutual funds / ETFs can ultimately lose value during the investor's desired holding period.
2. Income / return not known in advance.
3. Might not keep up with inflation.

Dividend-paying funds

1. Ease of use
2. Higher upside potential of stocks as opposed to bonds
3. Potentially higher income now in a low-rate environment
4. Potentially higher lifetime income
5. Potential for keeping up with inflation

1. Unprotected from (stock) market loss
2. Dividends can be reduced or eliminated by company management
3. Income is unpredictable

Dividend paying individual stocks

1. Higher upside potential of stocks as opposed to bonds
2. Potentially higher income now in a low-rate environment
3. Potentially higher lifetime income
4. Manager of this approach and / or owner can choose a smaller number of stocks than a typical fund so as to maintain potentially higher income
5. Potential for keeping up with inflation

1. At minimum requires more time spent by owner - OR -
2. Requires hiring a professional manager
3. Unprotected from (stock) market loss
4. Dividends can be reduced or eliminated by company management
5. Income is unpredictable

Guaranteed (joint) lifetime annuity aka SPIA - "Singe Premium Immediate Annuity"

1. Stable, predictable & known lifetime income.
2. Guaranteed typically by a large, long-standing insurance company
3. If the dollars are large enough, more than one annuity can be purchased from different insurers for further diversification
4. Guaranteed by insurance company so much lower probability of "running out of money."
5. Requires no management so works well for a beneficiary who is unable or unwilling to manage.

1. You are "trading" your principal for a stream of income - so
2. You no longer have access to the capital used to purchase the annuity
3. If bought without a COLA, ("Cost-of-Living-Allowance") fixed lifetime payment means it will not maintain purchasing power if there is inflation.

Fixed annuity with predetermined maturity date (e.g. 5 years)

1. Stable, predictable and known return for the predetermine period.
2. Return of your principal guaranteed by insurer at maturity date.
3. Little or no management required
4. Less downside risk than stock market

1. Not guaranteed lifetime - just for a term of years.
2. Reinvestment risk. At the conclusion of the predetermined period, you receive your principal back and then have to find a new investment
3. Historically on average lower return than stock market
4. Probably won't keep up with inflation

Guaranteed (joint) lifetime income rider on fixed or variable annuity

1. Stable, predictable & known lifetime income.
2. Principal can be invested in stock market for potentially higher returns than bonds
3. Unlike a SPIA, you do have access to your capital
4. Guaranteed typically by a large, long-standing insurance company
5. If the dollars are large enough, more than one annuity can be purchased from different insurers for further diversification
6. Guaranteed by insurance company so much lower probability of "running out of money."
7. Can be "managed" but does not require management so works well for a beneficiary who is unable or unwilling to manage.

1. While lifetime income is guaranteed, your cash flow paid out can reduce your capital, depending on your investment results.
2. If your capital "runs out," your guaranteed (joint) lifetime income does continue, but there is no capital to be inherited by e.g. children, grandchildren or other non-spouse heirs.
3. Significantly more expensive than investing in the same underlying sub-accounts without the guaranteed lifetime income rider.
4. Complexity, so helpful to have access to someone knowledgeable about this category.