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September 26, 2016

The Retirement Income Puzzle: “6% Guaranteed for Income Purposes?”

By J. André Weisbrod 

Part One: Investment Alternatives

The radio advertisement promises you 6% “guaranteed for income purposes.”  It is a plug for insurance company annuities.  An ad by a nationally known advisory firm in a magazine says you should “hate annuities.”  Others promote high yield stocks, tax free bonds or private lending for retirement income.

As with anything else, we need to discount the hype and slick promotions and get to the heart of the puzzle.  We can use many different investment alternatives to create income.  The question is: What fits our situation best?  In many cases it will be a combination.  Let’s look at some of the main strategies.

Here are the main types of investments that can be used in a retirement income strategy (in alphabetical order):


  • Annuities - Single Premium Immediate (SPIAs)
  • Dividend Paying Stocks
  • Fixed rate Guaranteed Investments (Bonds, CDs, Deferred Annuities)
  • Income-Producing Real Estate
  • Private Equity (& Private Lending)
  • Stocks to Produce Capital Gains
  • Work (Create Income via a job or entrepreneurial activity)

·        It is possible to utilize all these, and for some people that might work well.  Use of these depends largely upon the following factors:

Wealth – If you have a lot of investment capital, your options, and how you organize them, are likely to be different than if your investment assets are limited.

Lifestyle – Budget is critical.  It must fit your income potential.

Inflation – If your inflation rate averages 3%, your living expenses will double over 24 years.  If your income needed now is $75,000, in ten years you will need $100,794 of income to keep the same lifestyle.  This is a critical factor.

Health – Health problems that could reduce life expectancy and/or increase your income needs.  This is where Long Term Care (LTC) becomes a significant planning issue.

Estate Objectives – The type of financial legacy you want to leave is an important consideration.  Taking care of your spouse, children, grandchildren and charity all can be important objectives to many people.

Let’s take a basic look at each of the investment categories listed above.

Annuities (Immediate):

Let’s say you have $500,000 to invest for income and you are a male at retirement age (66).  Your actuarial life expectancy is roughly 17 years.  A female’s life expectancy is roughly 2.5 years longer.  Of course genetics and lifestyle can increase or decrease expectancy. 

For this discussion we will use the male age 66 life expectancy of 17 years.  If you divide $500,000 by 17 you get $29,412.  That is 5.88% of $500,000 or almost 6%.  Sound familiar?  In other words, if your $500,000 makes 0%, your money will last almost 17 years if you take 6% out each year.  This is the math that is the foundation of the insurance company annuity business. 

A key factor is that if you take a single premium immediate annuity (SPIA) from an insurance company, when you die the insurance company keeps whatever is left of the $500,000 plus whatever they earned on it while they had it.  Starting to see the light?  There is no free lunch.  This is particularly crucial if you have a spouse or others that need support if you die.

Annuities are guaranteed by the insurance companies and are subject to the creditors of the company if the company goes bankrupt.  In some cases there are state insurance funds that will help back insurance products, but they vary in size and ability to cover massive defaults.

One other factor must be mentioned, and it is an extremely important one.  With the typical annuity the $29,412 of annual income does not increase.  If you plan to spend it all, you will be in trouble down the road because inflation will eat away at your purchase power.    Therefore, if you are going to go the guaranteed income annuity route you better spend less and invest the excess to give you some inflation protection going forward.  If the insurance agent doesn’t go through all this with you then he is doing you a disservice and may not be acting in your best interest.  Also consider that the agent can get a 3%-5% (and in some cases up to 8% on some annuity products) commission to sell the product.  That can be as much as 4-7 years or more of investment management fees for a professionally managed investment portfolio.  (See addendum at end of article)

Dividend Paying Stocks and Public Limited Partnerships:

Many companies, including utilities and “blue chips” as well as mid and smaller sized companies pay stockholders a share of their profits, which are called dividends.  Many retirees like stocks that pay between 2% and 5% or more income based on the stock price.   If a company is successful, the price of the stock can grow and the dividend can grow over time.  The risks in stocks include market risk (prices fluctuate and can go down) and investment risk (a company can go out of business).   Note that stocks can be purchased individually or in mutual funds and exchange traded funds (ETFs).  Some advisers get paid to sell mutual funds and other “products.”  Again, find out how your adviser gets paid.  (See addendum at end of article)

Stocks to Produce Capital Gains:

Some stocks pay small or no dividends.  Usually these are called growth stocks.  They tend to be more volatile than dividend stocks.  However, they can be part of an income when they are sold.   If sold after being held longer than a year, the profits might be taxed at a lower rate than some dividends.  I have always maintained that where income comes from doesn’t matter, if all else is equal, and you can pay a lower tax.

Fixed Rate Guaranteed Investments (Bonds and CDs):

When you lend money to a bank, government or company, they promise to pay you a regular amount (interest) during the time you lend it to them and they promise give you the original amount of your money (principal) back at a certain date (maturity).  Treasury bills and bonds are guaranteed by the U.S. government as are most bank certificates of deposit (CDs).  Tax-free municipal and state bonds are guaranteed by the governments issuing them.  Corporate bonds are guaranteed by the companies issuing them.

In today’s low interest rate environment it is hard to find interest rates much above the actual inflation rate.  In other words, after inflation and taxes, the “real” rate of return on these instruments is actually negative.  Bond risks include rate risk (if interest rates go up, you are stuck with a lower rate), market risk (if rates go up the bond value goes down) and investment risk (the issuer can go bankrupt and you could lose it all if there is no insurance or inadequate insurance).

Regarding money markets and other short-term variable interest rate vehicles, these should be considered only for the following purposes: Short-term goals such as emergency funds, savings for major purchases within 2-3 years and a temporary holding place while you are deciding on investment strategies (i.e. for risk management when investment markets appear riskier than normal or you need time to decide where to put the cash). (See addendum at end of article)

Income-producing Real Estate:

Income-producing real estate includes apartments, office buildings, vacation property, storage facilities rented homes and more.  Real estate can be purchased individually or via Real Estate Investment Trusts (REITs), mutual funds, partnerships or private funds.  Yields of some REITs currently exceed 6%.  Depending on how property is owned risks can be similar to stocks and bonds (REITs) or it can include liquidity risk if the property is held privately.

Private Equity:

Generally for wealthy “accredited” investors, the private market offers opportunities to own interests in companies or real estate that are not traded in liquid markets.  If you have watched Shark Tank on TV, those kinds of investments are part of the private markets.  Among the risks are investment risk (you could lose the entire investment) and liquidity risk (you might not be able to sell your interest when you want to).  Advantages can include potential for higher returns, tax benefits and values not affected by the daily whims of fickle investors or market manipulators.


I actually do not like the word “retirement.”  I prefer the term “independence.”  I am a Christian and I can’t really find the concept of retirement in the Bible where a person simply waits out the remainder of his or her life watching grass grow, sipping on a drink and hoping the grandkids visit.

Whether you need or desire some extra money or can afford to volunteer, the final 20% or more of life should continue to be full, pleasant and productive, even if you don’t have to work.    My Dad didn’t need money, but he was as busy in “retirement” as he was running his business.  He was in the coast guard auxiliary.  He coached entrepreneurs.  He helped start a battered women’s ministry.

Do you have talents, gifts and interests that would allow you to help others?  Make some money, too?  Go for it.

IMORTANT:  Advisers and Sales People.  Good, competent advisers are important.  Though they are not perfect, they can help you avoid serious mistakes and guide you with knowledge, experience and wisdom.  But choose wisely.  Find out about their background.  Research them on the Internet.  Find out how they get paid, which will reveal their natural biases.  It is not that someone working for commissions can't make good recommendations; it just helps to be aware.  If the adviser is not knowledgeable and reasonably objective, and is more concerned about his or her paycheck than in your well-being, find another adviser.


There are a number of ways to create income during your “independence” days.  Each has a different set of risks and rewards and the puzzle can be difficult to put together.  Every person and every situation is different.  We need to take time and carefully plan because a mistake at retirement can greatly affect your quality of life going forward as well as affect your loved ones. 

Each person needs to evaluate their situation carefully to determine the allocation to these various potential income sources.  Hopefully your financial planner is able to use all within his or her practice and be as objective as possible.   It is important to retain good, competent and honest advisers. 

Part Two will provide a more in depth comparison of some of these alternatives.


More on Annuities

There are two big issues regarding single premium “immediate” annuities (SPIAs). First is the fact that you will lose principal if you die early (consider your survivors).  The other important issue is income growth to keep pace with inflation.  There are some annuities that may have riders to address some of these issues.  Shop carefully and buyers beware.

Another kind of annuity is a deferred annuity.  With deferred annuities there can be principal protection, but there are withdrawal penalties (as long as 7-10 years) and possible loss of principal if the insurance company goes under (except for variable annuities that are not subject to creditors of the insurance company).  

The Case for Equities over Bonds and CDs (and most fixed rate deferred annuities)

Yes, in our evaluation, dividend stocks are overvalued today, which is why we have raised more cash recently.  At some point we think these stocks will be at more justifiable prices. But even at today's price levels, we think they are superior to bonds and CDs.   Consider this: if interest rates rise 2 percentage points, a 15 year bond could lose over 20% of its value.  That is probably similar risk to the downside of some utility stocks.    Meanwhile can collect 4% or greater dividend even at today's stock price. So I'm 2% or more better per year in the utility than I am in the bond for 15 years and the utility dividend has a good chance of going up.  That covers about 30% (2% x 15 years) in price risk over the bond. 

If I'm a retiree and want to keep pace with inflation, I'm going to own the stock and not the bond. The bond will not go any higher in 15 years than what you paid for it (and less if you pay a premium), but in most (if not all) 15 year periods, the utilities or other quality companies that pay high dividends do increase in price as well as dividend payout.  While there is no guarantee, historically, owners usually do better than lenders (unless you are a bank and can charge extra fees or rape and pillage with credit cards).  I use bonds to provide a "drift anchor" to portfolios where the owners' risk tolerance can't handle 100% equities.  And because of the price risk, I am keeping maturities short (max 5 years), and won’t buy much at a premium.  At 1%-2.5% yields the bonds' after-tax and inflation real return is going to be negative.  Investors need to understand the math going in.


Disclosure:  I have not mentioned any specific securities in this article, only general asset classes.  We do not sell securities as a registered representative of a brokerage firm for commissions.  We perform financial planning for a fee and portfolio management for an asset based fee only.  Therefore, if your assets increase, our company’s income goes up and vice versa.  Our goal is to increase your assets.  At least you know we are on your side; our motivation is aligned with yours.   Individuals associated with STAAR Financial may have an insurance license and where a life insurance or annuity policy fits you, we may be able to help you.


If you need help managing your personal or business economic trends, we are here for you.  Call 412-367-9076 to set up a no-cost, no-obligation consultation in person or by phone.  STAAR Financial Advisors, Inc. offers wealth creation, management and utilization opportunities for people, families, businesses and organizations at all stages of life.  We provide planning, business consulting and investment management, including private equity opportunities for accredited investors.

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Investing involves risk.  When investing in stocks, bonds, mutual funds, real estate or even many so-called guaranteed investments, the future value of your account(s) can be worth more or less than when you first invest.  Past performance is no assurance or guarantee of future results.  Before making investment decisions you should consult the appropriate investment, financial planning, accounting and tax professionals. You are responsible for all decisions you make as a result of using the SFAMoney web site or any materials and information provided by STAAR Financial Advisors, Inc. either on this site, via email or any other conveyance methods.

This site is not intended as an individual advisory service.  The information provided herein is not intended to be specific advice as to whether you should engage in a particular trading strategy or buy, sell, or hold any financial product.   Individual Advisory and Private and Institutional Asset Management Services are provided separately.  VIP consultation services is provided as an expansion of the information contained on the site.  The VIP services on the site may provide additional information and insights, but will not make specific recommendations regarding specific portfolios.  Every individual and every organization may have unique financial situations and objectives and any specific actions are the responsibility of the investor.  We recommend that you consult with your own financial experts prior to investing and that you carefully read any prospectuses and related materials carefully before investing.  Should you wish to employ STAAR Financial Advisors, Inc. as a personal adviser for your specific investment and financial planning needs, call 1-800-332-7738, PIN # 3370 or 412-367-9076 or inquire on line by CLICKING HERE.

Nothing contained on this site should be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Nor is it intended as investment, tax, financial or legal advice

J. André Weisbrod is founder of STAAR Financial Advisors Inc. and the STAAR Investment Trust headquartered in Pittsburgh, PA. He has been named a 5-star Wealth Manager in Pittsburgh Magazine and is among the longest tenured fund managers with over 20 years managing the same funds. He is also co-founder of the Strategic Assets Fund 1, LP, a private equity fund for accredited investors. He is an author and speaker and has been interviewed, quoted or had articles published in a variety of media including Investors Business Daily,, The Wall Street Journal, Business News Network, the Pittsburgh Post-Gazette, USA Today, KDKA TV and Reuters TV.

Actively involved in church and community affairs, Mr. Weisbrod is committed to the well being of individuals, families and businesses. Avocations include competitive masters swimming, scuba diving, painting and photography, acting and music.