On my mother’s 100th birthday, I asked her: “Wow, you are 100 years old. How does that feel?” She gave a rather astute answer: “Well, I’ve lived a lot longer than I thought I would.”
Isn’t that the real concern for many retirees? It is not necessarily that a retiree will live to 100; most will not. But many may live longer than they think they will. If their retirement income plans do not factor this in, retirees may have compromised lifestyles in their later years. Their retirement “paychecks” may not cover the lifestyles they want.
A key factor for retirement income planning success is: Will essential expenses be covered by lifetime income? Lifetime income helps manage retirement risks, which in turn helps the sustainability of the retirement-income portfolio.
Essential expenses are those expenses that must be covered every month or year. Common essential expenses are property and other taxes, utilities, Medicare premiums, food, and similar costs. Each retiree can decide what is essential, and more than one list includes “essential” items like vacation or golf. The key is that these are expenses that the retiree must cover, or feel they must cover, regardless of current available cash flow.
Additional retiree expenses are usually considered discretionary. These expenses are a choice and can be adjusted downward (or upward) as needed. Often, these include travel, leisure activities, and making gifts to children or grandchildren.
Lifetime income can provide consistent income regardless of various risks. Many retirement risks are outside of the retiree’s control: Market volatility, inflation, and sequence of returns are common risks over which a retiree has little, or no, influence. However, these risks can have a significant effect on long-term portfolio sustainability. As an example, if retirement begins with several years of market decline, then the retiree accepts a much lower “paycheck” or potentially depletes his/her assets. A lifetime income plan can provide cash flow that covers these essentials.
Or, consider inflation. In the early retirement years, inflation is not likely to be a factor. But as the years pass and the cost of lifestyle increases, either the retiree reduces his/her lifestyle or will likely deplete assets more rapidly. A lifetime payment may allow the remaining portfolio to be better managed for growth.
Longevity is a major risk. While most clients have thoughts on how long they might live, they do not tend to pick a likely “expiration date,” much less agree to stick to that date. This means planning for a longer life without compromising current lifestyle.
The good news: Lifetime income provides a check for life–even when life turns out to be longer than the retiree thought it would be!
This material is educational and intended for an audience with financial services knowledge.
Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.
No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency
For financial professional use only. Not for use with the public.