If retirement is looming on your horizon, you are probably wondering if you will have enough money to last you through the rest of your life. A secure guaranteed income stream can bring some peace of mind, but where exactly can you put one in place? After all, Social Security will provide some benefits, but will it be enough?
The good news is that even if you feel that you could have saved more money than what you have, there are still options for securing a guaranteed retirement income. Let’s take a deeper dive into what some of those options might look like, and what they can do for you.
What Is a Guaranteed Retirement Income?
Guaranteed retirement income is just what it sounds like: money you can count on for however long your retirement lasts. You won’t outlive your money, and you can enjoy financial security for the rest of your days.
Travel, visits to the grandchildren, and other activities that you wish to pursue can be less financially stressful when you have income that lasts as long as you might need it.
What Are Sources of Guaranteed Retirement Income?
When most people think of retirement income, they immediately think of Social Security benefits. While Social Security will provide you with some income, the benefits are lower than many people realize.
The average Social Security check for retirees as of June 2022 was $1,306 a month. That won’t go very far. So, what else is there?
- Pension plans
- Reverse mortgage
- Life insurance
Let’s examine these one by one.
This requires planning at least ten years ahead of your retirement goal. If you work for a government employer, you might well have a defined-benefit pension.
Private-sector companies also used to offer pension benefits as well, but now it can be hard to find a job with a pension. If you haven’t spent 30 years with the same company and that company offered a pension plan, then the pension probably won’t be available to you.
It’s also fairly unrealistic in today’s market: the average person stays in the same job for just 4.1 years. Reasons for changing jobs often include advancement and more money.
Either way, if you are one of the lucky few with access to a pension plan at work, you would have some income that you could count on in retirement. Of course, you are also counting on your employer and its ability to make good on promised lifetime payments in the future, as well.
That might be good to keep that in mind as you think about guaranteed retirement income sources for your financial future.
An annuity is a financial product offered by an insurance company. One way to think of an annuity is as your own pension-like income source. An annuity’s goal is to provide you with a stream of steady income to last you through retirement, however long it might last. You can buy an annuity with a lump sum or with a series of payments.
Deferred annuities begin making payments at some future predetermined age. If you pass away before you reach that predetermined age, usually your spouse or another beneficiary can inherit the payments. With an immediate annuity, the contract ends when you pass away, unless the payout is structured to continue payments to a beneficiary.
There are also two different ways your money can grow within the annuity: Fixed-rate and . This is like a tax-deferred retirement savings account. With a fixed-type annuity, your money can earn interest but is also protected from the risk of any market losses.
Variable annuities invest in the market, and you have different funds that you can allocate money into, but you still have the guaranteed income option still in place. There is more market risk to a variable annuity, but there is potentially more growth as well.
You may ask yourself, “If I have enough money to invest in an annuity, why not park it in a savings account and withdraw it as I need it?” You could do that.
However, what happens if you set a new record for longevity and live to be 112? Your savings account was probably drained a long time ago. And that could feasibly happen even in earlier ages, such as the 80s or 90s, if your money didn’t grow at a rate above the typically low yield of a savings account. With an annuity, your payments are guaranteed, even if you live a ridiculously long time.
You can’t outlive your money. This can give you tremendous peace of mind, and help you to enjoy the money you have stashed elsewhere because you know you will still have money coming in throughout your life.
Another advantage is budgeting. For a certain type of person, having a lump sum in a savings account is an invitation to go shopping. Before you know it, the money is gone. With an annuity, you won’t have to worry about impulsive purchases and ill-thought out travel destinations.
Make sure to ask your financial professional about balancing your guaranteed income needs in an annuity with your liquidity needs and other parts of your financial picture.
If you own your home or have a lot of equity stored in it, you could consider a reverse mortgage.
Instead of you paying the mortgage company, they pay you a fixed sum. You need to own your home or have at least 50% equity to qualify. There are a lot of ways you can choose to receive the money: a lump sum, a credit line, monthly payments, or some combination.
Once you pass away, the amount of the loan will need to be paid back to the bank by your heirs, or the bank will sell the house to recoup its costs. And don’t forget to pay your property taxes and homeowners insurance while you receive your reverse mortgage payments–a few homeowners have had their homes foreclosed on because they forgot that.
There are two basic types of life insurance: term life and permanent life. Only permanent life insurance will provide you with an income stream in retirement. It’s definitely more expensive than term life insurance.
But as you move into your 60s, term life coverage goes up, and starting at a certain age, insurance companies won’t even underwrite term coverage for a prospective policyholder. So, if the prospect of another retirement income stream and life coverage that doesn’t expire (as long as premiums are kept up) appeals to you, the higher cost for permanent life insurance may be worthwhile.
Dividends are payments that stocks pay, usually quarterly. If you have invested wisely, dividend payments can provide income in retirement.
However, you need to have a lot invested. And that also assumes that those companies behind the dividend will continue them in years ahead (which many publicly traded companies do).
While this is another way to generate income in retirement, it isn’t guaranteed. Ask your financial professional about this and the other sources of income as discussed above, which can pay you guaranteed income for life, if that is important to you.
How Can a Guaranteed Retirement Income Help You?
Since no one can predict how long they will live, having a guaranteed income in retirement can help you enjoy your retirement more. You will know you won’t outlive your money, so you can enjoy the money you do have.
Retirees who have a guaranteed income stream tend to live longer, as a significant source of stress (running out of money) is absent.
How Much Guaranteed Retirement Income Will You Need?
According to experts, a very simple rule of thumb is that you will need about 70% of your pre-retirement income. You will spend less on food, clothing, and gas. Hopefully, your home will be paid off. And you won’t have to contribute to your retirement fund.
Some expenses tend to increase, though, such as healthcare costs. This is a very flexible rule of thumb, but it’s one starting point, and even then, it’s even better to come up with a personal picture of your future income requirements. A great way to take a gander of what your personal retirement income needs will be is to use your current spending as a clue-in of what future spending might look like.
The Bottom Line About Your Financial Security
A guaranteed stream of income in retirement that lasts as long as you live is the ideal situation. Ask a financial advisor about what type of annuity, or other guaranteed retirement income option, may be right for you.
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