How Will You Draw Income in Retirement?
Whether you bring home a paycheck or earn your keep from entrepreneurship, everyone has some primary income sources during their career. But things change in retirement.
Some folks continue to work in some fashion, often for their own enjoyment. However, chances are you won’t count on this same income source in the way that you did during your career. You may well have to find a way to replace this income with other income streams.
This brings up a big question: How will you draw income for your retirement spending needs?
What Income Sources Will You Use?
There are several sources which you may be able to tap for retirement income. Those potential assets can include CDs, Treasury securities, savings bonds, I-bonds, TIPS, and corporate or municipal bonds.
What about other sources of income that aren’t fixed-interest assets of sorts? There are also preferred stocks, REITs, income from rental or commercial properties, or even payments just from cash.
Some retirees also depend on proceeds from mutual funds and ETFs as another common source of monthly retirement income. If you are an accredited investor, then income from limited partnerships or other private investment opportunities may be a possibility.
Part-Time Work, Another Income Source?
Many folks turn to employment as a continuing source of income, so they are working for more than just personal fulfillment. In that regard, income from a part-time job can be another way to tie over on recurring expenses for your lifestyle each month.
Of course, keeping this up can depend on your health and other circumstances, such as whether you will still have reliable transportation after you retire.
The One Thing That Pays Guaranteed Lifetime Income
However, there is one other possible source of guaranteed income that is available to you.
Annuities can pay you a stream of income that you can’t outlive. You will continue to receive payments if you exhaust all of the money in the contract.
In fact, besides Social Security an annuity is the only financial vehicle on the planet that is capable of paying you a truly guaranteed income for life. The insurance company is bound by law to keep sending you a monthly check for as long as you live. You can think of an annuity as a form of private defined-benefit plan.
Every month, you will receive your income check like clockwork, no matter what happens in the markets. These annuity payouts will continue like clockwork until you die.
Continuing Income for Spousal Needs
Annuities can also pay a joint benefit, so that as long as either you or your spouse is living, one of you will continue to get a monthly check until death.
Annuities are also one of the few types of vehicles that grows on a tax-deferred basis, and unlike with retirement savings accounts, the IRS has no limits on the amount of money that you can put into one.
There are three main types of annuities: fixed, indexed, and variable. Here’s a breakdown on each type of annuity and how they work.
Fixed annuities are the simplest type of annuity in the marketplace today. They function much like CDs, except that they are backed by an insurance carrier instead of the FDIC, and they grow tax deferred.
Fixed annuities pay a fixed rate of interest for a set period of time, such as five years. Fixed annuities are popular alternatives for risk-averse retirement savers because they usually pay slightly higher rates than other types of guaranteed instruments, such as CDs or government bonds.
Fixed Index Annuities
This type of annuity is more complex than a fixed annuity. Fixed index annuities guarantee the protection of your principal from market losses. That being said, the amount of interest that they pay is tied to an underlying financial benchmark, such as the S&P 500 price index.
Fixed indexed annuities have what are known as crediting periods, which is a period of time in which interest is calculated and then credited. This period could be for a month, a quarter, a year, or even two years.
When the underlying index rises in value during a given crediting period, then a portion of its growth will be credited to the contract as interest. But if the index declines in value during the crediting period, the contract value merely remains the same.
In this way, your money is protected from losses by declines in the underlying index. There is a trade-off for this protection. The interest that a fixed index annuity earns is limited in some capacity, either by a cap, a spread, or a participation rate. Your financial professional can explain the pros and cons of this financial option for growth and income.
A variable annuity has the most growth potential of all annuity types, but it also carries the most market risk. The contract owner’s principal isn’t guaranteed in a variable annuity.
Money that is placed inside one of these contracts is invested in a selection of mutual fund subaccounts that rise and fall in tandem with the stock, bond, and real estate markets.
But while variable annuities carry the greatest amount of risk, they can also deliver the greatest potential for returns over time. Variable annuity contracts today usually come with several money management features, such as periodic rebalancing.
What Makes Sense for Your Retirement Goals?
Your financial advisor can walk you through all of these options. They can help you devise a comprehensive retirement plan that fuels your income needs and lets you live a comfortable retirement lifestyle.
Consult your advisor today for more information on annuities as a guaranteed lifetime income source and how they could benefit you. If you are looking for an experienced, independent financial professional to guide you through your retirement what-ifs, no sweat. Many independent financial professionals are available here at SafeMoney.com to assist you.
Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, situation, and explore a working relationship. Should you need a personal referral, please call us at 877.476.9723.