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Income in the future will be challenging to the individual investor. With the changes happening with the investor base, I am referring to the baby boomers and the fact they are retiring soon, we have to readjust out thoughts on how much is too much from our portfolio.

We all invest for future income, this is a fact. Even if you buy a “hot stock” to make fast cash, your overall objective is to have a comfortable retirement. So how much can we expect to withdraw from our investments we make today?

This question has been put to the test over the last 7 to 10 years. If this was 1997 you would hear, “go ahead withdrawal 8%, we can make it up in the market”, but is this true in today’s world? The answer is obvious, no. With the uncertainty of the market, not being able to get consistent returns and bond yields in the toilet it is difficult to even imagine getting a 10% average rate of return.

In fact, Ibbotson’s has stated they are readjusting their future outlook of market returns from about 10%, historical average, to about 9% returns from equities. This means that taking out 8% is going to be a pipe dream and, more to the point, really not a good idea.

Ibbotson’s also is suggesting having a percentage of your investment assets into an annuitizable asset. This could mean an annuity, bond or another type of fixed income. An annuitizable asset is anything that produces residual, consistent income.

The problem with any type of fixed income product, whether it is a bond, fixed or immediate annuity, is the inflation factor. These instruments are great for providing current income, but they stink for keeping up with inflation. Inflation is very real, just look at the price of a stamp or a gallon of milk over the last 20 years, this produces a problem for those who seek current income and inflation protected income in the future. As of right now there are not many good places to turn to that will give you the best of both worlds.

What do experts predict will be a “safe” amount of money to withdraw from your investments, without creating future problems for you? 4 to 5% is the consensus. That’s right; we went from feeling good about taking 8% withdrawals out of our investments to now only taking 4 to 5% and feeling safe about it. Why could this be? It’s simple really; equities are not ever going to give you a straight 8 to 10% rate of return.

I know this goes against conventional wisdom to make that statement. After all we have been told by experts that the market returns about 10% on average for about the last 80 years. What they do not mention is that the market does not go straight up. They also fail to mention that the average investor has only averaged about 4% over the last 10 years. They also forget to tell you that we have had large numbers of years where the market has had flat returns. The 1970’s is a great example of this, from 1970 to 1980 the market started and finished at almost exactly the same value.

The average investor’s returns are so low because we, as a whole, love to tinker with things. When the market goes down we tend to sell with it and when the market goes up we tend to buy with it. This cycle is typical and predictable and it will not ever change, it is human nature driven by fear and greed.

I also side with the experts on only being able to withdrawal 4 or 5% from your investments; this amount will have to be sufficient. We, as a group, have not saved enough money to retire comfortably. We have money in equities, but not as much as we should have. Still we have, as a group, a lot of money invested into stocks. This is especially true of baby boomers.

We also have to look at the facts; 77 million baby boomers are retiring over the next 10 years. That is roughly 25% of the population, a truly staggering number. Where do the boomers have a lot of their money invested? In stocks, of course. What happens when we switch from growth to income, do we keep our money in stocks? No. Investors switch to bonds or other fixed income producing instruments, not all of it but most of it gets switched to bonds.

This big switch from stocks to bonds, or other income instruments, will create a drag on the stock market. When we have substantial money coming out of stocks it will cause the market to decrease in value. This is what the experts and Ibbotson’s are planning for and this is why they are reducing their forecast of equity returns in the future. If they are planning for this to happen shouldn’t you be planning for it as well?

Will 4 or 5% get you the type of income your need for retirement? I cannot answer that question for you, but if you think the answer is no then you need to save more money. When we are talking about investments we must understand that you need to have an asset allocation plan. Making any type of single investment is never a good idea, diversification and asset allocation will make up the bulk of your rate of return.

A side note: I would no be invested too heavily into REIT’s at this stage of the game. Investing in REIT’s now is like buying internet stocks back in 1999, it is just not a good idea.

I have seen many investment “gurus” say that you can plan on taking 8 to 10% withdrawals from your investment in the future. I would have to say they are making a ton of money off of your needs. Anyone who says they have a system of making you 10% or can show you a way to take 10% from your investments in the future are just not being truthful. No one can guarantee future results from investments made today.

You need to plan on your future income and you must make sure your future income is protected from inflation. This is one reason why I like the new For-life living benefits on annuities. These types of benefits allow you up to 5% withdrawals for the rest of your life. They also allow you to step-up your base benefit, so if the market goes up in value so can your income. The For-life living benefit can provide you with current income and income in the future, unlike any other investment you could make. The best part is that you never have to annuitize a For-Life benefit.

Scott DeMonte is a widely respected expert in variable annuities. Scott has worked as both a financial advisor and as an executive for 2 of the best selling variable annuity contracts sold in America.

With over 12 years experience in the financial services industry, Scott decide to start his own company, http://www.annuityiq.com. Through his expertise he evaluates and rates variable annuity contracts.

By educating both brokers and consumers, Scott’s goal is clear: Get the right information, the first time.

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