Personal Pension

Client Scenario

Rebecca and Dale

Rebecca and Dale met on a whale watching catamaran tour in Alaska. Introduced by a mutual friend, they hit if off pretty quickly. Both were divorced, and the last of their adult children were already out of college. Neither was particularly interested in disrupting the relative simplicity of their lives to meet someone new and cultivate a relationship, but they struck up a friendship that grew into something neither anticipated.

Married now for six years, they are exercising plans for the next significant phase of their lives: retirement. At 65, this is also Dale’s third marriage, which has made them very thoughtful about how to structure their finances together. Before they even sought out a small venue for their wedding, they hired a fee-only fiduciary, Katherine, to help organize their money.

When she was a young mother, Rebecca, 63, took time out of her career to raise children, so her retirement savings aren’t where she’d like them to be. Neither have pensions, and two divorces have taken a bit of a toll on Dale’s finances, but together they are sure they can enjoy a fairly comfortable retirement, if only they can manage to make their savings last.

Prioritizing longevity risk, Katherine assessed their budget, expected Social Security benefits, projected healthcare needs, and retirement goals. When they built the plan 5 years ago, she recommended that they both wait until their full retirement age to begin taking Social Security to maximize the benefit. She also recommended that they create a ‘personal pension’ from a portion of Dale’s IRA to provide a guaranteed lifetime income stream.

According to the plan, they will create their ‘personal pension’ by purchasing a single premium immediate annuity (SPIA) with $300,000. This joint policy will guarantee a $1,500 monthly income stream over both of their lifetimes that will cover potential budget shortfalls and leave a significant portion of their assets to remain invested. They’ll then be able to complement that ‘personal pension’ with income distributed out of their IRAs via the safe withdrawal method. This will help them potentially meet needs beyond their budgeted expenses and allow a portion of their assets to continue to grow…Especially as healthcare expenses continue to rise.

Katherine explained that with the SPIA, Dale and Rebecca are buying an income stream to insure both of them against outliving the money they’ll need to meet basic needs in retirement. The SPIA isn’t an investment. Unsure of how income can be ‘guaranteed’ and unsure of the practicality of ‘giving’ such a large sum of money to an insurance company, their planner explained how mortality credits reward longevity with more payouts.

Having a portion of their assets remaining in the market, along with a guaranteed personal pension gives them a balanced footing, and peace of mind as they begin taking distributions next year.

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