Retirees want three things from their retirement income:
- A very low risk of outliving their money.
- Predictable, consistent availability of income.
- Enough liquidity that they feel flexible enough to pay for emergencies -- or splurges.
But as the Rolling Stones sang, "You can't always get what you want. But if you try sometimes, well, you might find you get what you need."
Dealing with longevity is the hardest part of retirement planning. "The reality is that any retirement financial plan has to consider your whole lifetime. The trouble is you don't know how long you'll live," says Rod Greenshields, consulting director of Russell Investments’ adviser-sold business, only a little facetiously.
Like many retirement planning firms, Russell focuses a lot of brainpower on figuring ways around this uncertainty. One of the best ideas Greenshields believes they've come up with is to look at retirement in 10-year chunks of time. The first 10 years is a slam-dunk. Most people live that long, and they have the money to pay for it. The second 10 years is dicier. And the third is almost certainly unknown territory. If you're lucky enough to get to a fourth decade, as Greenshields puts it, "The funnel is insanely wide."
To narrow that focus, Russell suggests a simple approach. Organize your assets to get yourself comfortably through the first 10 years of retirement with enough left to theoretically buy an immediate lifetime annuity that will provide money to cover all your predictable income needs for the second 10 years and a significant portion of your expenses for the ensuing decades -- however many years that is.
If your retirement planning has been successful and things are going well at the end of the first 10 years -- you're healthy, and your investments have earned a comfortable return -- you don't need to buy an annuity. You can just rinse and repeat, betting securely on the come in decades three and four.
But if the first 10 years of retirement have been rough, you've left yourself the option and the means to lock in a steady income that will carry you into the future.
If in the course of that first 10 years, "Your portfolio value drops below that annuity cost -- even if it pains you -- you might want to consider annuitizing right away," Greenshields says.
Russell Investments doesn't sell annuities, and Greenshields says their advisers understand perfectly why annuities aren't popular. But he expects their purchase to be increasingly attractive to aging boomers in search of a longevity hedge. "There is a lot of value in keeping that option to annuitize open."