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The Importance of Dependable Income

The Importance of Dependable Income

| June 23, 2023

It is fair to say that most of us appreciate dependable income streams.  All over the country people lay down money for scratch-off lottery tickets that promise the chance to “Win For Life”!   FDR’s New Deal established social security – and that helped the country move on from the Great Depression.  All over cable news entitlements like social security are discussed and it appears few politicians want to even risk the Russian roulette of being the sacrificial lambs that have to change a system that we all know at some point will need changing.  Apparently, no one wants dependable income to become suddenly undependable. 

Often, I have conversations with public sector workers who value their pension and spend countless hours debating about when to turn it on and which option to select.  Rightfully so, as a pension is a valuable asset.  I also have conversations all the time with private sector workers who lament the fact that they wish they had a pension like their parents’ generation.

People really like dependable income.  It also turns out people may really need dependable income.

Yet something happened right around 2008.  Dependable income started getting associated with annuities (this makes sense because an annuity – by definition – is a dependable, consistent income stream).  And all of a sudden – while interest rates were dropping across the country – dependable income started getting a bad reputation.

So, what happened exactly? 

Many financial advisors started recommending variable annuities that offered guarantees against market downturns at a time when the market was doing a lot of serious downturning.  Not all of these products were great.  Some were good and others not so much.  Fees started increasing as insurers were needing to hedge a greater amount of liability in a much lower interest rate environment as well.

Meanwhile a lot of personal finance “gurus” on cable (who actually gave up their licenses and held no fiduciary standard) started pointing out all the flaws of these vehicles, grabbing headlines and selling lots and lots of books in the process. 

The market started doing a pretty good job of going up as well.  From March of 2009 until February of 2020, it went up a lot more than it went down. 

So, it began to feel like we didn’t need to depend on dependable investments quite as much anymore and the word annuity became a four-letter word. 

But despite all the negative press – something interesting kept consistently happening.  Studies would come out indicating the importance of not outliving your wealth and about avoiding the perils of market volatility.  Researchers from around the country kept publishing works indicating that dependable income mattered and that maybe now it mattered more than ever.

With pensions going the way of the dinosaur and social security under scrutiny it became apparent that creating your own dependable income streams for a portion of your wealth actually passed real actuarial muster. 

In another example, with the passing of the Secure Act in 2019 - annuities could now be offered inside of 401k.  Congress determined more dependable income streams could be an advantage to our aging baby boomer population and beyond.

Then, in an example of the pendulum completely swinging back the other way the New York Times published an article titled “For More Certainty In Your Retirement Portfolio, Consider Annuities”.  It is believed more than a few people fell out of their chair that morning reading those words.

One really nice side effect of “The Great Inflation” of 2022? 

You don’t even have to use annuities to create dependable income.  High-yield savings accounts, CD’s, treasuries, dividends, fixed annuities, immediate annuities, indexed annuities – there are now all kinds of tools that provide attractive options for some nice rain or shine income.  The income menu hasn’t been this robust since before the fall of Lehman and really since before a bunch of dot com bubbles burst into thin air.

Perhaps the most valuable part dependable income?  No matter how you generate it – it actually allows you to be more aggressive and more growth oriented with your “non-dependable” money.

This is sometimes referred to as asset matching.  Make sure the basic bills are covered through regular cash inflows.  The fun stuff, the aspirational stuff, the occasional splurges – take it from the up and down money when it is up and avoid taking when its down. 

So, should you have a lot of dependable income in your portfolio?  Maybe, maybe not.  The truth is, it depends.