Starting the Retirement Income Conversation
As people are living longer lifespans these days, it brings to mind a considerable concern for many – that of outliving their money at a time when it is needed the most.
But how can you ensure that you’re filling in all of the “gaps” when it comes to the amount of retirement income that you need?
How to Determine the Right Amount of Retirement Income
There are a number of areas that need to be covered when designing your retirement income strategy, and in order to get started, it is important to first understand the options that you have.
For instance, retirement today is quite a bit different than retirement of even just a few decades ago. In the past, many people could count on a “defined benefit” pension plan from their employer.
As its name implies, a defined benefit plan provides a known amount of income that is received on a regular basis. Typically, these plans are funded by the employer, as versus the employee – and it is also the employer who takes the risk if there is a downturn in the market.
Years ago, the income from a pension plan, combined with Social Security benefits, was oftentimes more than enough to provide a comfortable living for most retirees. But this isn’t the case any longer.
Due in large part to the expense of keeping up with defined benefit pension benefits, the majority of companies have done away with these plans, and instead they have started offering “defined contribution” plans. The most popular of these is the 401(k).
With a defined contribution plan, rather than knowing how much income you will have in the future, you are only allowed to contribute up to a maximum amount each year. In addition to that, the responsibility for ensuring that there is enough money in the account to generate a viable amount of income has shifted from the employer to the employee.
And unfortunately, due to low savings rates and/or market volatility, most of today’s workers do not have nearly enough to sustain an ongoing income in retirement – at least not if they are going to “draw down” the account on a regular basis.
So, will the money in your 401(k) plan be enough?
The good news is that, no matter how much you have saved, there are ways to generate an ongoing retirement income when you need it.
Income Planning is a Process
If you’ve ever planned to go on a long expedition, you are likely aware that getting home safely is just as important – if not more important – than achieving your goal. Take, for instance, those who have climbed Mount Everest.
This isn’t something that you just “decide” to do one fine day and proceed out the door to head towards the foot of the mountain. Rather, it can take months, or even years, of preparation. As a part of your prep, you would most likely determine your best route, as well as what type of equipment you will need, and what you need to do in case you have to make any detours along the way.
Once you’ve made it to the top of the massive mountain, though, while you would have certainly chalked up a great achievement, your work is only partially done, because you still need to make your way back down.
Retirement income planning can be a lot like that. Many investors, as well as financial services professionals, tend to only focus on getting to the top of the mountain. They may do so by setting their sights on a specific “number” or by chasing return. But even if you have saved and invested well, it is essential to convert those savings into a sustainable and reliable retirement income stream.
In other words, retirees don’t live on net worth. They live on income. And even if you have a substantial net worth, if you can’t convert it over to an income stream, you may find that you are not able to live the future lifestyle you had hoped for.
Transitioning from Accumulation to De-Cumulation
As the Baby Boomers have moved through the spectrum of life, financial professionals have focused primarily on working with their Boomer clients to accumulate assets. But now, with roughly 10,000 people turning 65 every day in the U.S., we are in the midst of a great shift.
Here, while financial advisors and consumers have – for the most part – become adept at putting money away in savings and investments, few are prepared, or are even knowledgeable about, how to turn those assets into an income stream.
Just simply withdrawing a certain amount from one’s portfolio can be a dangerous way to go – and there are several key reasons for this. One is that, given the volatility in the market, retirees can essentially be rolling the dice with their future financial security.
Plus, as people are living longer and are spending 20 or more years in retirement, it is absolutely essential to have an ongoing stream of income in place that can be counted on regardless of what happens in the market, or even in the economy overall.
Stepping Through the Road to Retirement Income
In creating a good, solid retirement income plan, there are several parameters that need to be addressed. These can be planned for by asking – and answering – some key questions, such as:
- How much income will be needed in retirement?
- Can income increase down the road in order to keep pace with future inflation?
- How long, given your current savings, can you anticipate income to last in the future?
- If there is a market correction, how will that impact assets and income going forward?
Considering the Guaranteed Income Solution
As the shift is made from accumulating assets to securing a future income stream, one financial vehicle that should be considered is an annuity. Annuities by nature are designed for retirement income purposes.
But are annuities a good option for retirement income?
They certainly could be.
With an annuity, a guaranteed stream of lifetime income can be secured – regardless of how long you live and how long you need it to pay out. Because of this, it can alleviate the worry about running out of income before essentially “running out of time.”
Today’s annuities can also offer benefits beyond that, though. For instance, depending on the type of annuity, funds may be accessed – penalty free – for paying long-term care costs or expenses that are related to a chronic or a terminal illness.
Annuities can also provide a number of advantages during the accumulation period, too. As an example, with fixed index annuities, money inside the account has the opportunity to grow, based on the performance of an underlying index.
However, if the index performs poorly during a given year, the account value does not fall. Rather, a 0% return is credited to the account for that time period. This allows the funds to continue building on previous gains, without having to make up for any losses. On top of that, the funds in the account grow tax-deferred. The can allow them to compound much more quickly than if they were in a taxable account.
Taking the Next Step for Income Planning
Although there are many options for creating a sustainable income in retirement with an annuity, these products can – and oftentimes are – somewhat confusing. With that in mind, determining your best options can best be done by working in conjunction with an annuity specialist. That way, you can be more assured that you are moving forward with the right piece for filling in your future income gaps.
Not sure how to start – or continue – your retirement income conversation? Contact us here and we’ll help to point you in the right direction.