The challenge may seem daunting at first, but you have several options to ensure retirement income. Some are more suited for long-term planning, while others can be last-minute moves before you stop working. Your best results may come from a combination of both.
Purchasing an Immediate Annuity
What’s the easiest way to achieve guaranteed retirement income? Purchase it. This is exactly what you do when you buy an immediate annuity. You use a lump sum to buy guaranteed income.
You can choose an option where income will be paid to you for your lifetime or for a joint lifetime if you are married. Purchasing can be a lifetime deal for people who aspire to live to a century! You can’t outlive your income with an immediate annuity.
As the name suggests, “immediate” means that income starts right away, so the right time to consider this option is when you are ready to retire. You want a source of income that starts immediately. The amount of monthly income you can receive depends on your age. The older you are, the higher the income you will receive for every dollar you invest.
Using Guaranteed Withdrawal Benefit on a Deferred Annuity
Look for an annuity that has a guaranteed minimum withdrawal benefit (also known as GMWB) or lifetime withdrawal benefit (LWB) if you want to purchase guaranteed retirement income in the future.
You deposit your money today with the intention of withdrawing income at some point after 10 years or more in the future. The insurance company takes a snapshot of your account value every year as you go along. The higher new value is secured as a “new income base” as the account value grows. You can use the current higher account value or the income base value to generate guaranteed withdrawals when you activate your withdrawal option.
Note: The amount you can usually withdraw ranges from 4% to 6% of the account value/income base value. The exact percentage depends on your age at the time of withdrawal and the terms of your contract.
Using this option can be a good way to protect account values from the impact of a significant market downturn if you are 10 to 15 years away from retirement. This is especially true if the downturn occurs as you approach your retirement age.
Working Toward a Pension
It’s great to retire with a pension. Some professionals spend the last ten years of their working life with a government agency just to secure a pension. It’s a smart move for those who haven’t saved enough for retirement earlier in their career. Look for employers who offer pensions and check their vesting schedule.
Note: You may want to wait a bit if you are considering changing employers, and if the additional work means you have more guaranteed retirement income. These options can help make your retirement more secure.
Some people worry their pensions may not pay all the benefits promised to them. The older you are when you start your pension, the safer your income is. There’s a type of government insurance called the Pension Benefit Guaranty Corporation or PBGC. It protects pension benefits, but the guaranteed amount has a limit. The guaranteed amount is reduced for each year you retire before age 65. Start your benefits at age 65 or later to maximize the guaranteed amount if your pension is covered by the PBGC.
Getting a Reverse Mortgage
Guaranteed retirement income is simply that: income you can rely on for life without any risks. A reverse mortgage can provide that level of security, and the income is tax-free. So why don’t more people use it? There are two reasons: fear and fees.
First,
people fear that the bank could take their home. This was true in the past, but legislation has changed significantly since around 1985. This product is now safer, more robust, and less risky for borrowers.
Secondly, some people believe that the fees are too high. Again, legislation has improved this situation. Fees can no longer exceed the limits set by the government. A reverse mortgage can be a good option if you are 62 years old or older, looking for guaranteed retirement income, and you have paid off your first loan or have a lot of equity in it.
Be Cautious When Claiming Social Security Benefits
Most retirees receive the bulk of their guaranteed income from Social Security. Social Security benefit recipients receive a cost-of-living adjustment every year, which usually leads to an increase in benefits.
The problem is that most people still take Social Security too early, or they don’t coordinate with their spouses if they are married. Hundreds of thousands of dollars in income can be missed in the form of spousal benefits or widow benefits because one spouse made an unwise decision about when to start their benefits.
Try to avoid claiming Social Security benefits at age 62. Benefits that start at a later age will yield better results for you and provide more guaranteed income over your lifetime.
Put Money into a Deferred Income Annuity or QLAC
A longevity insurance is a form of a deferred immediate annuity that will guarantee you a minimum income amount at a specified future age, such as 85 or 90.
There is a special type of this product called QLAC or Qualified Longevity Annuity Contract. It is purchased within a retirement account, like an IRA or 401(k). QLAC allows you to defer the start of required minimum distributions.
People with longevity insurance feel safer spending their retirement funds on fun and travel while they are younger because they know they have a future guaranteed income source to cover their needs later on.
Build a Bond Ladder
Many retirees fear spending down their capital, but it can be normal if organized the right way as part of a plan.
You can build a bond or certificate of deposit ladder. This involves purchasing a certificate of deposit or bond maturing in a specific year with the amount you will need at that time to cover expenses. When the bond matures, you spend it.
Another option is to use treasury securities. These are bonds issued by the U.S. government and are considered one of the safest investments you can own. Financial institutions can split the interest portion of the bond from the principal portion, creating something called STRIPS (Separate Trading of Registered Interest and Principal of Securities). You can purchase these strips with staggered maturities, creating a guaranteed stream of income with each strip maturing in the year you will need it.
Frequently Asked Questions (FAQs)
What is a good monthly income in retirement?
The average retirement income in the United States was $47,357 for those over 65 in 2021, according to Annuity.org. “Average” means that half of retirees had income above that amount and half had less. Your income can be considered “good” or at least better than half of retirees in that age group if you have income above average.
Can you live off a retirement account?
Living off a retirement account depends on the type or types of retirement accounts you have chosen and when you decided to start taking the largest withdrawals. It also heavily depends on your expenses in retirement. Create a projected budget, then calculate any other sources of retirement income you plan for. Determine whether the retirement account you have chosen or are considering will be sufficient to cover any shortfall.
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Sources:
The Financial Industry Regulatory Authority, Inc. “Immediate Annuities: Money Now and for the Rest of Your Life … for a Price.”
Pension Benefit Guaranty Corporation. “Maximum Monthly Guarantee Tables.”
Pension Benefit Guaranty Corporation. “Glossary, Early Retirement Age.”
Pension Benefit Guaranty Corporation. “General FAQs About PBGC.”
Consumer Financial Protection Bureau. “What Is a Reverse Mortgage?”
Social Security Administration. “If You Are The Survivor.”
Social Security Administration. “Starting Your Retirement Benefits Early.”
The Financial Industry Regulatory Authority, Inc. “Deferred Income Annuities: Plan Now for Payout Later.”
Annuity.org. “Average Retirement Income: Where Do You Stand?”
Source: https://www.thebalancemoney.com/guaranteed-retirement-income-4065314
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