Most of us are very aware of the constant drumbeat from financial advisors who are telling us to save now for retirement.  There are all kinds of different plans from standard IRAs to Roth IRAs to pension and SEP plans.  And if you are like most people, then your focus has always been how you put the money away and how you invest it to develop the largest nest egg that you can.  But there is another side to retirement planning that gets less attention.  This is the issue of how much you can withdraw from your nest egg each year after you retire.  And it turns out that one of the more powerful tools for handling this problem requires action from you years before your retire. 

I’ve heard it described this way before:  that you don’t want to run out of gravy before you run out of biscuit and vice versa.  The concept is simple, the solution very complicated.  What is the right amount of money to withdraw from your retirement savings each year so that you don’t run out of money before you die and also so that you don’t have most of it left behind after you die?  Experts have worked on this problem for many years and the the answer itself is an elusive moving target.

While there is some disagreement on the percentage of withdrawal that you make each year from your retirement accounts, most experts will put the range at somewhere between 2% and 4%.  So, let’s crunch those numbers just a bit to give you an idea of what that looks like.  Let’s say you have accumulated $1 million in your retirement account.  A 4% withdrawal each year would be $40,000 per year.  Assuming your retirement funds are not Roth IRA funds, then it is likely that you will have to pay income taxes on that money.  Suddenly, that $1 million doesn’t seem like so much money.  And to make matters worse, there is the timing issue to consider.  If you began your 4% withdrawals on January 1, 2000 with your retirement account invested in 55% stocks and 45% bonds, then today you would only have a 29% chance of making it through 3 decades without running out of money.

To further complicate this decision, consider that you just can’t choose a withdrawal number and stick with it with no future adjustments.  Prior to the 2008 market meltdown advisors were telling people that a 7% per year withdrawal was safe.  That is because they were relying on past history of stock market returns to make their calculations.  But this process is like driving a car by only looking in the rear view mirror.  So you will need to constantly adjust your expectations and if you get it wrong early in your retirement, then you will have almost no way of making up the losses.

Earlier I mentioned that there are ways to create income streams that you cannot outlive.  Annuities can do this very well.  The problem is that some are expensive and may not generate the monthly income that you need from your nest egg.  However, there is another solution.  One life insurance company is now offering a cash value life insurance policy that can generate guaranteed lifetime withdrawal rates of 7% or more as long as you live.  And if you die early, unlike with straight annuities, the life insurance and cash value amounts return to your estate so that your investment is not lost.  Of course these policies are not for everyone, you have to be healthy enough to qualify for the life insurance policy in the first place and you need to put this tool in place a few years before you retire.  But once you have created this bucket, you can dump more money into it later on from other retirement accounts and have all of that money going to work providing you a larger income stream throughout your retirement years.

At Clinard Insurance Group, we insure thousands of families all across North Carolina.  We can help you with your auto insurance, your home insurance as well as your life insurance or your business insurance.  Please call us toll free, at 877-687-7557 if you would like our help with any of your insurance needs.

Insurance policies are legal contracts.  By their very nature, they are complicated and often difficult to understand.  Pity the poor insurance companies that need to come up with every way that they can to protect themselves in these contracts so that they are truly only taking on the exact risks that they thought they were when they wrote up the contract in the first place.  However, a recent court case shows just how easily an insurance company can get caught and strangled with its own written words.  In this case the online cultural encyclopedia site, Wikipedia, plays a big role.

This case involves a homeowner insurance policy and the exclusion in the policy that is designed to prevent the homeowners insurance policy from providing liability insurance for personal watercraft like jet skis and ski doos.  Liability insurance for these devices is beyond the scope of what is charged for homeowners insurance and traditionally if you want liability protection for these types of watercraft, then you should plan to purchase a separate watercraft insurance policy to accomplish that.

In this case, a southern Utah family, the Oltmanns, owned  a Honda F-12 Aqua Trax personal watercraft.  While operating this on a lake in Utah with a friend on board, Aqua Trax was involved in an accident which injured the guest riding with the boat owner.  They filed a claim with their homeowner insurance company, Fire Insurance Exchange, and the claim was denied based on the exclusion in their homeowners insurance policy that states that no coverage is provided for bodily injury that results from the ownership, maintenance, or use, loading or unloading of jet skis.

In the resulting lawsuit, Fire Insurance Exchange v. Oltmanns, the insurance company argued that the term jet ski was merely a synonym for personal watercraft and therefore the exclusion applied in this case.  There is no doubt here that this was the intent when the policy was written but once in court, intent is sometimes a hard thing to prove.  Besides, remember that your insurance policy is a legal contract and so it will be interpreted by the courts strictly on the words in that contract.

The court relied in large part on the Wikipedia definition of the term jet ski to come to the conclusion that the jet ski exclusion in the homeowners policy was ambiguous.  Wikipedia defined the term jet ski as a specific brand name of personal watercraft.  And using this definition the court found that the wording in the homeowners policy was imprecise.  Insurance contracts, are written by just one party to the contract, the insurance company, so any ambiguity in the wording is always construed against the writer of the contract.  The court found in favor of the Oltmanns in this case.

In the North Carolina homeowners policy the term jet ski is not used, instead the term personal watercraft is used when describing this exclusion.  But it is interesting to note that a web site like Wikipedia can rise to the level of a legal source for definitions in the short time that it has been in existence.

If you need help with any of your boat insurance or homeowners insurance needs, I hope you will call us here at Clinard Insurance Group, toll free, at 877-687-7557.  We look forward to helping you with all of your insurance questions.