Everyone has a personal vision of what their retirement will be. What kind of retirement lifestyle do you want? How much will it cost? Apart from the vision, it’s good to know how you will pay for your retirement quality of life and where your income will come from.
Many income strategies can be tailored for your financial situation. However, only a guaranteed retirement income plan can provide you with a game plan for secure, permanent income streams that don’t change with investment market ups and downs.
The issue with other standalone income planning approaches, such as a bucketing strategy or a systematic withdrawal strategy, is that your funds can go up and down in value with market swings. With a guaranteed retirement income plan, your income is protected and keeps coming to you like clockwork each month.
Of course, a guaranteed retirement income plan does have some limits. If the payouts from your income source are fixed, it may be hard for your money’s purchasing power to keep up with inflation. You also tend to give up some liquidity in exchange for the assurance of protected income for life, although some financial vehicles come with withdrawal provisions for a little bit of liquidity.
In this article, we will go over the lynchpins of an income plan paying a steady, guaranteed income during your retirement years: Social Security, annuities, and pensions. Let’s talk about these different income sources and how to optimize them for a financially confident retirement.
What Is a Guaranteed Retirement Income Plan?
In simple terms, a guaranteed retirement income plan is a strategy that uses certain income sources to generate a steady, reliable flow of money. Retirees depend on this stream of steady payments to cover their monthly living expenses and, at times, other spending for their lifestyle.
The greatest fear of many people is running out of money in retirement, a crucial point when retirees’ lifespans are rising. There is more to this picture as well. In the early years before and in retirement (also known as the retirement risk zone), an unpredictable risk called sequence of returns can arise.
Sequence of returns refers to someone having ill-timed investment losses in this period of life just before and in early retirement years. If that happens, the retiree may have to change their lifestyle or goals, as they don’t have time to recover from losses as they did in their working years. Any withdrawals taken by the retiree compound further on those investment losses, making the losses even steeper.
A guaranteed retirement income plan protects against these hazards, such as longevity risk and sequence of returns risk. You keep receiving monthly payouts even if investment markets head into correction or crash territory.
A guaranteed retirement income plan is usually put into place before you need the income. That gives your income benefit some time to accrue before you turn it on. This sort of plan is typically set up with Social Security, annuities, and pensions as the driving income sources.
Social Security Benefits
Social Security benefits are a foundation of retirement income for millions of Americans. That being said, it’s not meant to replace all of the income that you brought home during your career. According to the Social Security Administration, on average Social Security will replace about 40% of your yearly pre-retirement earnings. That can leave a sizable gap to cover.
Now, while Social Security provides retirement, disability, and survivor benefits to eligible beneficiaries, here we will talk about retirement benefits. People earn ‘credits’ for Social Security based on their work history. You can accrue a maximum of four credits per year of work history. To be eligible for retirement benefits under Social Security, you generally need 40 credits, which means 10 years of work.
How much you will receive in Social Security benefits is determined in large part by your earnings record (how much in work income per year) and your work history. You are able to take 100% of your Social Security benefit at your full retirement age, which varies depending on your birth year.
Maximizing Social Security Benefits
Knowing how to maximize your Social Security benefits can make a big difference in your overall income strategy. You can claim your benefit as early as age 62, but your monthly benefit will be permanently reduced unless you take your benefit at full retirement age. If you delay taking your benefit past full retirement age, your monthly benefit will increase for each year that you wait. By waiting until age 70, you can receive up to 132% of your full retirement benefit, which will greatly boost your monthly income from Social Security.
If you are married, you have additional options for maximizing Social Security. You may receive up to 50% of your spouse’s benefit, even if you have no work history. This can be a very helpful strategy for couples that have one spouse who stayed at home to raise children.
There are many different possibilities to consider for taking Social Security. Talk to your financial professional for guidance on what claiming strategies might be right for you. For example, here are some things to consider if you do decide to wait until 70. If so, you may have to draw on your retirement investments for an “income bridge” from between when you retire and when you take benefits at 70.
Pensions are a long-time source of guaranteed retirement income, especially for employees in government and typically in big corporations. Understanding how your pension plan works and your options with it can help you make the most of it in retirement.
A pension is a retirement plan provided by your employer. In retirement, you receive regular payments. The payment amount is based on your years of work with your employer, your salary history, and a formula that is set by the pension plan. You may also choose a survivor payout option that will provide continuing payouts to a surviving spouse, but your pension payments will be reduced in exchange for that benefit. Either way, your stream of payments will be a guaranteed income stream for life.
In your pension plan, payments may well be subject to cost of living adjustments so that your payments keep some pace with inflation. You can check with your pension plan to see if that applies.
To qualify for a pension benefit, you must meet a vesting period requirement. Or in other words, you must work at your employer for a certain number of years. For example, if your pension plan has a vesting period of five years, then you must work at that organization for at least five years in order to be 100% vested in your pension plan.
If your pension plan observes it, the Rule of 85 is a way to see if you are eligible to retire with your full pension payments. According to the Rule of 85, if adding up your age and years of service equals 85 or greater, you qualify for your full pension payouts. Say that you were age 60 and had 25 years of service. In that case, you would be eligible for your full pension benefit (60 + 25 = 85).
Some pension plans may also have early retirement options, although they may come with downsides such as reduced pension benefits. The conditions for eligibility may also be quite involved. Talk with a knowledgeable financial professional who has experience with retirement planning, pension benefits, and income strategies for some guidance on what your plan options might be.
Annuities are another way to generate secure, guaranteed retirement income. Unlike Social Security and pensions, annuities are personal vehicles for retirement saving and distributions. In other words, an annuity can be set up and structured to fit your income needs and financial situation. You can think of an annuity as a “money for life contract.” In that way, it works as a personal pension plan, but with more customizable features and flexibility in your retirement income strategy.
Annuities are contracts between someone and a life insurance company. In exchange for a lump-sum premium payment, the insurance company promises to make regular payments to the contract holder over a certain period, often for life. Annuities can be a great option for those looking to create a reliable, guaranteed income stream, supplement other sources of retirement income, maximize their dollars in retirement, or get a multiple on benefits for certain long-term care situations.
Different Types of Annuities
Annuities come in a variety of flavors. Immediate annuities start income payouts right away, while deferred annuities begin payouts at a later date and give your money time to grow. Deferred annuity types include fixed annuities, fixed index annuities, and variable annuities, which vary according to growth potential and market risk exposure. Fixed annuities and fixed index annuities have principal protection, and variable annuities give you the most growth potential but put your money at risk.
While you do “tie up” your money in an annuity, many annuity contracts come with the ability to take out a certain amount of money each year (free withdrawal provision). If your annuity has an income rider on it, you may also retain some access to your money as well and still have the benefit of a stream of lifetime payments (usually in exchange for an annual fee).
Annuities are the only thing besides Social Security and pensions that can pay you a guaranteed income for life. Not everyone has a pension, so it’s worthwhile to look at these financial instruments if the prospect of a guaranteed retirement income plan sounds appealing to you. Talk to your financial professional about different annuity options, and what each of their pros and cons are.
How Much Money Should You Put in a Guaranteed Retirement Income Plan?
The answer is it will depend on your current savings, needs, goals, and overall financial situation. No two people’s circumstances are ever the same.
That being said, here is a starting point to think about. Your monthly living expenses are the baseline of your lifestyle in retirement. If you can’t cover those expenses, then your quality of life will suffer somehow. Investment strategies that can yield changing income from month to month may not provide the consistent cash-flow that you need.
You may want to consider a guaranteed retirement income plan that generates enough reliable cash-flow each month to cover your monthly lifestyle spending.
For example, say that your monthly living expenses are $5,200 and your monthly Social Security benefit is $3,100. In that case, you might consider an annuity that can cover the monthly gap of $2,100. Because of how insurance companies pool their investment risk tied to them, annuities can give you more bang for your buck than what you might get from other financial instruments.
If retirement is still a decade or so out, you might not quite know what your monthly living expenses will look like. No sweat. Your current spending patterns are a great clue-in and can indicate what your sort of spending you might have in retirement.
Is a Guaranteed Retirement Income Plan Right for You?
Worried about putting too much money into a guaranteed retirement income plan? No worries. One great part about a guaranteed retirement income plan is how they can be integrated into an overall retirement income strategy with other moving parts.
You don’t have to commit all of your money to a guaranteed strategy. By having your living expenses covered with guaranteed income, your other assets can have more market risk – and therefore growth potential – for keeping up with inflation.
In that sense, a guaranteed retirement income plan is a cornerstone of financial security in retirement. Social Security, annuities, and pensions (if you are fortunate to have one) each have unique advantages and downsides, which can be a powerful addition to an overall retirement strategy.
Think about ways to maximize your income. Delaying Social Security until age 70 can greatly boost your benefit, but that should align with how long (or short) your retirement might be based on family and personal medical histories.
Pensions are a disappearing benefit, and if you have one at work, make sure you are fully vested. Guidelines such as the Rule of 85 can indicate when you might be eligible to retire with your full pension benefits. And if the prospect of your own personal pension with more flexibility and choices appeals to you, explore annuities. They come in many flavors and contract designs so that you can find what is a good fit for your situation.
Ultimately, a well-balanced retirement income strategy may incorporate a combination of these sources, providing both guaranteed income and potential for growth. Talk to your financial professional about your options to create a winning plan for a secure retirement. If you are looking for a financial professional to assist you, many independent and experienced agents and financial advisors are available here at SafeMoney.com.
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