Financial planning is not a new phenomenon. It’s been around for 50+ years. While financial planning has been around a long time, the question is whether most financial plans accomplished the goals they set out to achieve.
Typical Financial Planning
Financial plans will vary depending on age (years until retirement), income level, desired lifestyle in retirement, amount of certainty you are looking for, etc.
As a general statement, with financial planning, people are trying to determine:
- How much to save for retirement
- A reasonable rate of return on available assets before and after retirement
- How much can be spent in retirement with the amount of money saved
It sounds simple, but for many, their financial planning goals are not achieved.
Financial Planning in the 1980s
Back in the 80s interest rates were at near historic highs (a high of over 18% in 1981*).
Typical financial planning would budget for clients to save X amount of money every year for retirement where they would earn a “reasonable” rate of return before retirement. The reasonable rate of return was typically provided by having a decent amount of money invested in the stock market.
Once in retirement, many clients were told they should/could change their investment mix from more risky stocks and mutual funds to “fixed” investments which would provide sufficient returns to generate the projected income in retirement.
What fixed investments? Certificates of Deposit (CDs) and Money Markets (MM)
The problem when doing typical financial planning in the 1980s at a time when interest rates were high is that even conservative projections 10-20-30 years later as to what CDs and MMs would yield for returns were wrong.
A projected fixed return in the 1980s might have been 6-8%.
Where are the fixed returns on CD and MM accounts today and what have they been historically?
Today CD rates are less than 3% for anything under a 2-year, and slightly over 3% for a 5-year*.
FYI, CD rates from 2012-2017 yielded less than 1%*.
CD rates in 1985 were in excess of 10% (for a 6-month, 1-year, and 5-year)*.
FYI, CD rates in the 1990s ranged from a high of just under 9% to a low of around 5%*.
*Numbers from BankRate.com
How did projecting out fixed instrument rates of return work out?
If you did typical financial planning in the 1980s and budgeted for a 6-8% return on assets such as CDs, you would have come to the realization that you were in big trouble.
For those who didn’t significantly adjust their retirement plan by saving more over the years, the consequence could be 1) delaying retirement or 2) spending less than budgeted in retirement (meaning a lower quality of life in retirement).
Guaranteed Income for Life Products
One way to protect your future income vs. leaving it to whatever fixed return investments maybe be 5, 10, or 15 years from now is to use certain types of annuities that offer a guaranteed income for life feature.
Ask yourself this…if you knew that an account value used to calculate a guaranteed income for life payment would accumulate at a guaranteed rate of 6.63% annually for 10 years and that the guaranteed payment rate at age 65 would be 5%, would that interest you?
If you were 55-years old and had $250,000 to place in an annuity with the terms from the previous paragraph, the guaranteed income payment at age 65 would be $24,570 every year no matter how long you lived.
While guaranteed income rider annuities are not for everyone, they can be a vital tool for many who are looking for certainty in their retirement plan.
Would You Like To Talk?
If you would like help mapping out your retirement or if you would like more information on guaranteed income rider products, you can call us at (888) 937-1937, send us a message, or schedule an appointment with one of our advisors. We’d be happy to talk with you or sit down for a one-on-one meeting.