THE SITUATION
Matching increasing longevity with increased savings is among
the biggest challenges facing retirement savers. It's not an abstract one for
Mr. Littell, whose father retired at 75 and is 103. His father has managed his
own finances well and, when he started spending down assets at 84, bought an
annuity with some of his money. "It let him sleep better at night,"
Mr. Littell said.
Mr. Littell's doing well on the savings side. He earns a salary
in the low six-figures and has saved throughout his career, putting 10%, on
average, into a defined contribution plan.
He said he's an example of how the defined contribution environment
— that's 401(k) territory, an environment without defined benefit plans, the
traditional pension — can work "as long as you contribute, roll the money
into an IRA when you change jobs, and invest for the long haul." A $20,000
rollover made years ago has more than quadrupled and is his biggest retirement
asset. Most of the money is in a variety of low-cost stock mutual funds. He
also has a small defined benefit plan, which was frozen.
THE VISION
After training financial reps on the importance of getting
clients to really plan what their retirement will look like, Mr. Littell is
realizing it's not so easy. "This idea that somehow you have this clear
picture of what you want as you approach retirement is kind of a fantasy,"
he said. "Life's more fluid than that."
For example, the couple might want to move somewhere warmer, but
haven't decided where yet. You have to know the details of housing costs to
figure out how much you need to retire comfortably. There's a "crazy
expensive" continuing care retirement community in California they're
interested in, but if they move there, it means much higher expenses than for
other options.
Mr. Littell's main Retirement
Insurance Policy objective is one many people share: having
the financial freedom to
choose how he spends his time. He expects to work in retirement, educating
consumers, but work won't be the highest priority, if his planning works. And
he doesn't want to worry about that work being compensated.
THE FIRST CONSIDERATION
The wisdom of waiting as long as possible to take Social
Security is one of the personal finance Ten Commandments. Here's how that works
in Mr. Littell's situation.
The Social Security benefit paid at the full retirement age of
66 is 100% of what's called the primary insurance amount (PIA). Edward took
Social Security at 70, so he got four years of what's called deferral credits.
At 8% a year, those credits add up to a 32% increase, so he gets 132% of his
PIA.
THE BALANCING ACT
Lots of people like the idea of guaranteed income in retirement
plans, in theory. But who wants to lock up the bulk of their money? "For
me, the real, visceral experience was about how much money I was willing to
part with," Mr. Littell said. "It was more about a percentage — 15%
to 20% of assets — than trying to get a specific income."
He definitely does want eventually to create a greater stream of
income, but wants to buy it over a period of years. He can eliminate some of
the risk of being heavily in equities as he nears retirement
plans by locking in some income now — but doing it gradually means he won't
have locked up his assets and be in a bind if a big health or other issue comes
up.
THE SIMPLER PRODUCTS
The simplest annuity Mr. Littell and his husband own is a deferred income annuity on
Edward's life. They paid $60,000 for it when Mr. Littell started focusing on
retirement planning late last year, and it will start paying a little more than
$500 a month when Edward turns 74, and keep paying as long as he lives. They
chose an annuity that doesn't provide a benefit after Edward's death because it
provides the largest lifetime income payout.
Another somewhat serendipitous element of his plan comes thanks
to a low-cost variable annuity. He bought it long ago with money from a small
inheritance, less because he wanted guaranteed income than to defer taxes on
the account's growth. The account balance is invested in low-cost stock mutual
funds.
