Insuring Your Plan for Retirement Income

‘Longevity insurance’ ensures you don't run out of money in retirement. How to figure out how much you need, the types of annuities to use and when the income should kick in are tricky questions, though.

As the saying goes, the best insurance is the kind you don't use. That is certainly the case with auto and home insurance. When you insure your income for a long, healthy life, however, it is possible to acquire the peace of mind of protection and create a major source of your retirement income as well.

Don't Hand Your Retirement Income Planning Over to AI Just Yet

In my last article, Are You Worried About Running Out of Money in Retirement?, I showed how adding income annuities could prevent you from running out of money in your plan for retirement income even in a scenario where there was no increase in the share price of stocks over your entire retirement. In contrast, the plan without annuities in this scenario ran out of money at age 91. That meant no income from savings and no portfolio of stocks and bonds to fund unplanned expenses. (These and other calculations are based on the Go2Income planning method to develop plans, estimate annuity rates and prepare comparisons.)

Ensuring the outcome from a plan for retirement income reminds me of a need that new homeowners have when they take out a mortgage to purchase that first home. It was originally called mortgage protection life insurance — and it fostered the growth of the private home market in the ’40s and ’50s.

Be a smarter, better informed investor.

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Well, the same is true of the retirement market. To minimize the risk of running out of money, retirees may need what is known as "longevity insurance." Fortunately, this type of protection is offered by highly rated insurance companies, provides unique tax benefits and, subject to your own evaluation of suitability, is available without underwriting. Also, payment rates are up 20% to 45% from the start of 2022.

But the term "longevity insurance" does not fully convey what income annuities can do and how to structure them. The question is how much, which types of annuities to use and when to have the income kick in. The way to decide when and how much is to test various configurations in your plan for retirement income.

Here's a primer on the three basic forms of income annuities:

Besides the structure above, each of these annuity types can continue annuity payments for the life of a spouse, or if no spouse, for the life of a beneficiary, until the purchase price is recovered. Of course, understanding what the annuities can do is only the start.

Now, here are some decisions to consider when you plan for life-long income with these annuities:

There are virtually an infinite number of "income start" options to consider based on your personal objectives. Here are two of the most frequently requested, using plan results for our investor at age 70 with $2 million in savings to evaluate.

Plan insurance #1. Ladder income starting at age 75 for both a DIA and a QLAC and consider that lifetime income as an inflation hedge.

Plan insurance #2. Defer income under both to age 85 and build the largest amount of income protection.

Set out below are the results for Plan #1 and Plan #2 using 12.5% (or $250,000) from the $2 million in savings to purchase plan insurance. Note the impact under Go2Income planning on starting income, cumulative income and portfolio value.

Plan #1 above uses the laddered annuity income to fund the increasing income in part, requiring a smaller amount of IRA withdrawals at the start and which in turn allowed our investor to maintain more of her portfolio value. Note that even with a starting income percentage of nearly 5.8%, her portfolio climbs to nearly her current level of savings.

Plan #2 below is the one to choose when you want more income earlier in retirement and will accept a slightly lower long-term liquidity or legacy. Note that her starting income percentage is over 6.2%.

Higher income or greater legacy?

Plan #1 preserves most of the IRA/401(k) savings, allowing you to leave a larger legacy. Plan #2 creates more income by pulling from your IRA and 401(k) accounts earlier in retirement, with a DIA and QLAC supplying income later, for a combination that produces greater income.

Curious About a QLAC? SECURE 2.0 Act Gives This Annuity a Boost

There is always a tradeoff, but you can choose the plan that works best for you and your family. The right approach will help you ensure the success of the plan you choose.

A Go2Income plan can help you choose not only the right products you’re your specific situation, but the right way to insure your income throughout retirement.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.

With so many FIA products available, each with its own contract terms and varying rates, it's crucial to invest in one that fits your retirement plan.

By Cliff Ambrose•Published 2 June 23

A stock split can indicate that a company is healthy — but don't fall for the hype.

By Charles Lewis Sizemore, CFA•Published 1 June 23

An indexed universal life insurance policy can help you with tax mitigation and extra retirement income in addition to death benefits for your beneficiaries.

By Mike Decker•Published 1 June 23

Here's a standard order for when you should tap which account when you’re in retirement.

By Evan T. Beach, CFP®, AWMA®•Published 1 June 23

To put things in perspective, focus on what you can control and remember that the ups and downs of the markets and economy can be cyclical.

By Erin Wood, CFP®, CRPC®, FBSⓇ•Published 1 June 23

Instead of panicking, consider opportunities to add flexibility and resilience to your financial position. These steps can help you enter a potential recession from a position of strength.

By Christian Mitchell•Published 31 May 23

This permanent life insurance provides a death benefit to your beneficiaries but also offers a cash-value component that can grow over time.

By Mike Decker•Published 31 May 23

The authors of the new book 'Real-Time Leadership' outline the traits of effective leaders (kindness is key) and what will ensure a leader's failure.

By H. Dennis Beaver, Esq.•Published 31 May 23

Planning that integrates income annuities can help alleviate the No. 1 fear of retirees, even in worst-case investment scenarios and when living way beyond your life expectancy.

By Jerry Golden, Investment Adviser Representative•Published 30 May 23

Silicon Valley Bank's collapse adds to distrust in institutions, and that's affecting nonprofits and grantmakers. Fresh expressions of transparency can show that the nonprofit sector is different.

By Stephen Kump•Published 30 May 23