Reconsidering protected income strategies

Individuals 07.26.2018 3 MIN READ

As institutionally funded pension plans fade into the past, more and more employees are facing retirement with uncertainty. Proactive planning is more important than ever for the self-funded investor looking to create a reliable, sustainable income stream throughout retirement.

Why protected income is more important than ever

In 1975, 88% of private-sector employees were covered by a defined benefit pension plan; by 2005, this number had dropped to around 33% and is now estimated at less than 10%. As of 2016, only 20% of Fortune 500 companies offered a pension plan to salaried employees¹

The reasons for this shift are manifold. Cost is a major issue; administrative expertise is another; and finally, the Pension Protection Act of 2006 which created a corporate liability for pension shortfalls had a major dampening effect.

The chart below shows the dramatic shift in pension plan availability over time.

Pension Plan Changes Over Time²

“The decline of the traditional pension plan coupled with uncertainty around Social Security has a lot of clients asking ‘where will my cash flow come from?’ Establishing, committing to, and executing upon an integrated protected income plan helps to address this fundamental question,” says Ayco’s Dave O’Leary, Vice President, Wealth Strategies Group, who specializes in protected income solutions.

Retirement now requires active planning and participation by the individual. This means largely self-funding, managing your investments, and choosing the appropriate investment vehicles at the right stages of life.

This is where protected income strategies can play an integral part of any current retirement strategy.

A time for accumulation. A time for disbursement

At the early stages of a retirement savings plan, risk tolerance can be higher, but that equation flips the closer one comes to retirement age. More than anything, protected income becomes more important as one ages. An annuity may prove to be an effective option to safeguard your retirement in those later years.* You’ll want to consider your risk tolerance, tax bracket, and time to retirement and financial status before choosing the strategy that’s right for you.

Where do you start?

Timing is everything: when do you need to begin accessing your protected income stream?

Immediate Income – You can begin to receive payments after one month, in exchange for a one-time single payment. With immediate income, your assets have less time to grow and you may lose opportunity for growth potential.

Deferred Income – The longer you wait to take income from the annuity, the greater potential leverage for every dollar allocated, and the higher the ultimate income payment could be. Additionally, your assets grow tax deferred (earnings are not taxed until they are received). But, you may not have the flexibility to withdraw income prior to when originally planned without penalty.

Let’s look at the options

There are three annuity types to consider: Fixed, fixed indexed and variable. While all are designed to create a protected income stream to last throughout your life, it’s important to understand how each can work for you.