Two Schools of Retirement Income

This post does a decent job of summarizing the two schools of retirement income planning, calling them the safety first approach and probability approach. It doesn’t cover the hybrid methods or ways of adjusting the approaches to individual situations. But it’s a good overview of the approaches and should help you decide which way might be better for you.

At today’s rates, a 65-year-old man who invested $100,000 in a single-premium income annuity from New York Life would receive $518 in lifetime income; a woman of the same age would receive $490 monthly. (The difference reflects the fact that women live longer.) These rates stay constant for life, so the purchasing power of the annuity income in this illustration would decline over time; an inflation-adjusted annuity, whose payments rise over time, would cost more upfront.

The man would recoup his investment in 16 years, at age 81, while the woman would recoup her investment in 17 years. “Retirement is just expensive,” said Joe Tomlinson, an actuary and financial planner in Greenville, Maine, at the panel discussion. “When you use the safety-first approach, it actually highlights how expensive it is.”