I think there's a better question to ask instead of how "safe" is your retirement -- and that's how "fragile" are you, financially speaking, in the face of the most common retirement pitfalls? Can you pull out less than 4% of your nest egg and make ends meet? But nothing makes this strategy more perilous than terrible investment returns in the first five years of retirement. That's because the money you pull out for living expenses is being "sold" for cheap valuations, and it won't have any chance to grow during the following three decades. Are you ready for long-term care? None of this includes the other expenses that come with living your life before the need for long-term care. Officially, the trustees of the Social Security Administration estimate that full benefits can be provided until 2035, after which time only 77% of benefits can be paid. People more than a decade from retirement should make even more conservative estimates: Assume that you'll get only 50% of your "full" retirement benefit. If you want your retirement to be safe, you need to to the following three things: (1) plan on getting by withdrawing less than 4% of your nest egg if your portfolio takes a hit; (2) purchase long-term care insurance; and (3) if you're younger, assume that Social Security won't be as generous as it is today. Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.
United Technologies Corp. UTX, +0.58% is the first major company to offer a secure lifetime income default option within their defined contribution plan.
In 2010, UTC closed its cash balance defined benefit (DB) plan to new hires (after closing a traditional DB plan in 2003), but wanted to make its defined contribution plan function more like a DB plan. The management rejected the old savings-and-investment approach and decided on three principles for the plan: 1) keep costs low; 2) keep it flexible; and 3) ensure that participants will have adequate income in retirement.
The company elected an AllianceBernstein Lifetime Income Strategy. This product is an individual target date account with an optional guaranteed minimum benefit. The withdrawal amounts are set to last throughout a participant’s retirement, even if the market falls or the account’s assets run out. The individual has access to the market value at all times.
The company viewed this approach as the best compromise between an immediate fixed annuity, which would have provided the highest level of income, and a systematic-withdrawal plan, which would have ensured the greatest level of liquidity.
Allocations to the lifetime income portfolio – the default – begin at age 48 and gradually increase…