A savvy advisor recently asked me how much more income a Go2Income plan, with its integration of annuity payments and focus on income distribution, could generate compared to a traditional retirement income plan. Can it be 20% or more?
He remembered my discussion about rules of thumb in retirement planning: One size doesn’t fit all. In that article, I pointed out that the Initial Income Percentage (SIP) for a Go2Income plan is 5% – as opposed to the “4% rule of thumb” that many consultants include in their plans. (That extra percentage point from 4% to 5% equals a 25% gain.)
But I couldn’t give this advisor a definitive answer or a single percentage — because every investor is different. Investors become:
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- Bring a unique profile based on age/gender/marital status and savings.
- Do you have other retirement goals and risk tolerance.
- Experience a specific set of market outcomes.
While I believe in Go2Income planning, I’ll dodge the “income benefit” question until we discuss the numbers issue in more depth.
It’s not just about the numbers
In designing the Go2Income planning methodology and process, reducing the “risk of ruin” – or running out of money in retirement – is our number one goal. And within that constraint, the method strives to achieve the investor’s legacy goal wherever possible.
Compiling and presenting the numbers so that an investor can understand the plan and what the numbers mean is crucial. Here is our process:
1. To present a plan to an investor, We provide a “starter” plan that focuses on a few key plan outcomes: starting income, annual percentage income increase through age 85, percentage of secure income, and legacy at 95.
2. To present the detail, We use many illustrated charts to show investors the plan in an easy-to-understand form. Some examples are below.
3. To capture the often conflicting goals of income and legacy, We use a “decision table” to help us compare plans on a more scientific basis.
Below are illustrations of these three steps.
1. Simple definition of the plan
Here’s how we describe a starter Go2Income plan for the investor we often use in our examples (a 70-year-old woman with $2 million in retirement savings). Your starting income on the Go2Income plan is $114,000 per year and will increase by 2% per year to $135,000 at age 85. About 60% are safe, meaning they don’t come from the sale of investments. Her legacy at age 95 is $2,730,000 as she reinvests her income past her 5% income goal of $100,000 a year. We’ll use this example for the rest of the article.
2. Capture details in easy-to-understand charts
The predicted results of every decision you make can be clearly and quickly explained in a visual way, often with a graph. Such visual aids also show how unexpected turmoil – inflation, recession – can affect your income streams.
For the case above, here is how graphics fill the image:
(Image credit: Courtesy of Jerry Golden)
3. Consideration of planned income, income goal and legacy
The charts and starter plan information above consider income and legacy separately. But how do you achieve both goals? We needed to develop a “decision table” like the one below that shows:
- Income from a Go2Income plan based on a set of planning assumptions.
- Target income set by client; in this case 5% of savings growing at 2% annually.
- Excess income can be reinvested or liquidated in the event of a deficit.
- Rebate from the Go2Income plan along with the value of the reinvested or liquidated income.
Here is our investor-assured plan decision table, based on a long-term stock market return of 8% (net of fees) and other standard assumptions.
(Image credit: Courtesy of Jerry Golden)
This plan appears to be working as our investor meets her target income and achieves a legacy that exceeds her initial savings, but this is not true in every situation. Let’s use our decision table tool to answer the most commonly asked and basic questions.
Frequently asked questions about the plan
Q: What if the market doesn’t return an 8% stock exchange return over the long term and only 4% over the long term?
Using the same set of measures, the plan outlined below still meets the income target but delivers a lower legacy at 95 of $768,000. Under Go2Income, most of the market’s underperformance was passed on to the children or grandchildren.
(Image credit: Courtesy of Jerry Golden)
Q: What if I eliminate the annuity payments and achieve the same 4% long-term performance?
Instead of ending up at $768,000, the legacy portion of this plan will run out of money by age 92 — largely because there’s no source of income, like annuity payments, that would be unaffected by the market.
(Image credit: Courtesy of Jerry Golden)
This is not a satisfactory result.
What is the “number” of percent benefit for these two scenarios?
Coming back to the consultant’s question, our analysis shows a large increase in income goal while meeting a long-term legacy goal through the use of Go2Income.
This is how I would describe this climb:
If you believe in a 4% long-term return on the stock market but don’t want to include annuity payments, then you need to do that to achieve the Go2I legacy at 95 (and avoid running out of money). Lower your target from 5.00% to 4.09%.
(Image credit: Courtesy of Jerry Golden)
If you believe in a long-term return in the stock market of 8% and want to eliminate annuity payments, you need to lower your goal from 5.00% to 4.02% to achieve the 95 legacy of the Go2Income plan.
(Image credit: Courtesy of Jerry Golden)
Depending on how you look at it, adding annuity payments and using the decision table, there is an increase in income of 22 to 25%.
This is impressive. And while your situation will be different, a Go2Income plan is designed to create more income and a lasting legacy. For each.
When you’re ready to discuss a retirement income plan that will allow you to enjoy the rest of your life without a lot of money worries, go to our home page, answer a few simple questions, and get started to create your plan (opens in new tab).
This article was written by and represents our contributing consultant, not the Kiplinger editorial board. You can view advisor filings with the SEC (opens in new tab) or with FINRA (opens in new tab).
