Going Steady

Which is worse, death or outliving your income during retirement? At least one survey[i] says most Baby Boomers prefer death!

The typical solution for understanding the life longevity vs. income longevity problem appeals to statistical analysis; probabilities and uncertainty imbue both issues. However, the typical solution fails because statistics cannot speak to an individual case, only to large numbers. Our interest lies in individuals, so we appeal to solutions we believe can enhance the prospect for life-long, steady retirement income.             

A regular listener to Financial Fortitude’s radio program who seeks steady retirement income asked, “What is the better way to generate retirement income, bonds or annuities?” We’re sure others have the same question, so we thought it useful to distinguish these popular income sources:

  • Corporations and governments issue bonds. Only insurance companies issue annuities.
  • Third parties rate the creditworthiness of bond and annuity issuers. Ratings are useful to distinguish issuers more or less capable of keeping their promises.
  • Bonds typically pay interest via coupon payments and they guarantee principal repayment upon maturity. Then, investors can reinvest the principal. Annuity payments typically include both interest and principal. After the payment interval has elapsed, the account is depleted.
  • Bonds can be sold for a profit or loss before maturity. Annuities can be surrendered to the issuer, though sometimes significant charges apply.

Although bonds and annuities can offer suitable income sources for some retirees, annuities are particularly troublesome. In our opinion, other investments can often achieve many of the same benefits claimed by annuity issuers. Insurance companies act as middlemen, in our view. If investors construct their portfolios with some of the investments insurance companies use, they might not need middlemen to help create steady income. We examined a recent balance sheet submitted[ii] by one of the largest publically owned insurance companies and annuity issuers in the U.S. Here are the investment categories:

  • Bonds
  • Limited partnerships
  • Mortgage loans
  • Real estate
  • Real estate joint ventures
  • Stocks
  • Unit-linked investments

The list reveals at least two facts. First, this insurance company broadly allocates its income sources. Second, it uses both financial assets and non-correlated assets to generate income and preserve value.

Not all of the insurance company’s categories are suitable for all investors, however, the list brings to mind useful income sources many investors can use besides bonds and annuities:

  • Dividends from common and preferred stocks can supplement income.
  • Direct participation in real estate and energy projects can deliver income for accredited investors.
  • Investors can earn royalty income from mineral rights and from intellectual and other property.

Besides producing income, many of these investments are not correlated with changes in bond or annuity values. They can help stabilize portfolio value, create steady income, and help investors avoid outliving their income.

[i]Allianz conducted a survey titled, “Reclaiming the Future: Challenging Retirement Income Perceptions.” The survey asked about Baby Boomers’ retirement expectations and fears. Sixty-one percent fear outliving their money more than they fear death. A summary of findings and implications was retrieved at https://www.allianzlife.com/about/news-and-events/news-releases/Press-Release-June-17-2010. The “Wells Fargo Middle Class Retirement Survey” reports 22% of workers prefer an early death to running out of money. Several articles reference this study. One of them was retrieved at http://money.com/money/3528851/retirement-middle-class-not-saving/.

[ii]All publically owned corporations operating in the United States submit financial reports and other useful reports to the Securities and Exchange Commission. Investors can find reports at https://www.sec.gov/edgar/searchedgar/companysearch.html.

The opinions, news, research, analyses, prices, or other information contained in this article are provided as general market commentary and do not constitute investment advice. Financial Fortitude and its affiliates are not liable for any loss or damage which may arise directly or indirectly from use of or reliance on such information. Financial Fortitude has taken reasonable measures to ensure the accuracy of the information.

The opinions expressed and material provided are for general information and entertainment and should not be considered a solicitation for the purchase or sale of any security. You should not rely on any of the information provided by Financial Fortitude as a substitute for the exercise of your own skill, judgment, and due diligence when determining the appropriateness of any investment.

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