Making Your Retirement Income Last a Lifetime
Social Security and traditional pensions can provide lifetime income streams, but for most retirees, that may not be enough. They may end up tapping into their retirement savings to make ends meet. While you can't know exactly how long you'll spend in retirement, you can consider using two strategies — periodic withdrawals and an income annuity — to create income streams that supplement Social Security and pension benefits and provide you with extra peace of mind.
1. Conservative periodic withdrawals
A key to making your retirement savings last when taking periodic withdrawals is to keep withdrawal rates low, especially in the early years of retirement. So how much can you safely withdraw?
Many financial professionals suggest a graduated approach:
- Withdraw no more than 4 percent of your retirement savings in your first year of retirement.
- Each year, increase the dollar amount of withdrawals by the inflation rate.
For example: if you had $250,000 in savings, you would withdraw 4 percent, or $10,000, in the first year of retirement. If inflation that year was 3 percent, the next year's annual withdrawal would be increased to $10,300.
This strategy of keeping withdrawals low has a high probability of providing a lifetime of income. Bear in mind, however, that no withdrawal formula that can guarantee your retirement savings will last for your entire retirement period.
2. An income annuity
If you are in good health, an income annuity — also called an immediate annuity — can generate a steady paycheck in retirement and help you ride out the ups and downs of investment markets. In return for a lump sum payment, the annuity company agrees to provide you with a steady stream of monthly payments for your lifetime. You can even purchase annuities that continue to make payments to your spouse after you die.
Note: Don't confuse income annuities with deferred annuities, which start paying only at some specified time in the future
The benefits of a life income annuity include:
- Helps stretch your savings by providing a higher lifetime income than periodic withdrawals from a retirement account.
- Helps give you freedom from worrying about your investments and whether you will outlive your money.
- Provides a guaranteed source of monthly income.
Of course, there are also drawbacks to income annuities:
- Funds cannot be withdrawn from the annuity for unexpected expenses.
- Your heirs won't receive anything from the annuity after you die.
- Your monthly payments might not keep up with inflation. You can address this issue by purchasing an annuity with an inflation adjustment feature, but you'll have to pay more up front or accept lower monthly payments.
The best of both worlds
For many people, it can make sense to split retirement savings: A portion is used to purchase an income annuity and the rest remains in a mix of other investment options to help with inflation risk.
Before you make such a decision, do your homework. Try to figure out what your essential monthly living expenses may be in retirement — what you'll need for food, shelter, utilities, health care and any other necessities. Then determine your guaranteed monthly income from Social Security, pensions and other sources. If there's a shortfall, consider using an income annuity to help cover it.
The remainder of your savings can be put in other investment options. Those resources can provide a hedge against inflation and offer discretionary income for travel, exploring your interests and all the other perks that you've earned in retirement.
Take the next step...
Enjoy guaranteed retirement income! Find out if an income annuity or a deferred annuity is right for you.
