BlackRock, one of the world's largest financial firms, says three key steps can significantly boost retirement income. Most people focus on building their savings when planning for retirement. However, by also focusing on the drawdown phase, the duration of the accumulated nest egg can be significantly extended, according to a recent BlackRock report.
Consider working with a financial advisor when developing a long-term retirement plan for yourself.
Add a guaranteed lifetime income through an annuity
Annuities have become a hot topic in recent years as financial experts increasingly debate their pros and cons. One benefit is that they hedge against longevity risk. Barring a catastrophic failure of the insurance company, a lifetime annuity can guarantee you a minimum income for life. On the other hand, bond funds can sometimes post slower growth than even the standard S&P 500 index fund.
However, BlackRock argues that the benefits of hedging against longevity risk are quite large. By investing up to 30% of your portfolio savings in a retirement pension, you can lay a solid foundation for your future retirement income. Along with Social Security, you get an income that will never decrease or fade.
Switch to aggressive asset allocation
However, there is a catch to a retirement plan. As mentioned earlier, perhaps the biggest risk with annuities is their low rate of return. In fact, Fidelity says that annuities often return an eighth the amount of a basic S&P 500 index fund in recent years. That's a recipe for low, slow growth.
As such, BlackRock recommends balancing your fixed income investments with a more aggressive market portfolio. In other words, if it's just a stock market index fund like the S&P, use the security you have in your retirement to switch your portfolio to higher-yielding assets like stocks.
That way, the annuity's guaranteed income gives you better protection against losses, while increasing your overall purchasing power in retirement through projected stock growth. This allows you to maintain a strong stock portfolio later in life, when many investors would otherwise start reallocating their investments in favor of more stable, fixed-income assets like bonds or CDs.
“Adding a guaranteed lifetime income combined with more aggressive asset allocation results in a 29% higher annual ability to spend one's own retirement savings (excluding Social Security) and reduces downside risk by 33%,” BlackRock's report states.
Retire (and claim benefits) later in life.
Finally, BlackRock recommends postponing retirement by two years. The company is proposing to move retirement from age 65 to age 67, along with Social Security benefits and pension payments. However, this is not a postponed retirement. For those born after 1960, the goalposts have been pushed back and the full retirement age is 67.
However, the basic analysis of the company remains. As the company writes: “[a]”Of all retirement decisions, deciding when to retire and claim Social Security often has the greatest impact on an individual's financial security.”
Delaying this for even two years can significantly increase your Social Security benefits. It also gives your annuities time to continue growing, reinforcing their lifetime benefits while allowing your portfolio to accumulate additional years of quality growth.
BlackRock finds that postponing retirement by two years can increase a retiree's lifetime purchasing power by 16% and reduce downside risk by another 15%. Combined with increasing retirement by 29% from receiving an annuity and aggressive, stock market-based asset allocation, retirees can significantly extend the length of their retirement income.
The good news for many investors is that BlackRock is likely recommending a version of what you're already doing: diversification. This approach suggests that you should weigh high-security assets in the form of annuities against high-yield assets such as stocks. Delaying retirement is recommended to increase your lifetime Social Security benefits and maximize your late-life portfolio returns. For the average investor and saver, it's all entirely doable.
A financial advisor can help you set up a comprehensive retirement plan. Finding a financial advisor doesn't have to be difficult. SmartAsset's free tool puts you in touch with up to three verified financial advisors operating in your area, and you can have a free introductory call with your right advisors to decide which one you think is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Longevity risk is the possibility of living too long, and it's a perverse way of looking at life. So start making plans now to celebrate your centenary in style.
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