Retirement Income

How much income will I need in retirement?

Start by preparing a “retirement budget”. No one knows what the future will hold in terms of market performance, inflation, budget deficits, interest rates or a host of other factors. To be practical, make a budget based on your current situation, adjust for planned changes when retired, and then apply an inflation factor to compensate for the future. A budget worksheet is available for download. Download Here.

Sources of Retirement Income.

Before retiring, most working Americans have only one source of steady income: their job. In retirement you are likely to have a patchwork quilt of several income streams. Retirement accounts, Social Security, home equity, pensions, annuities, and part-time work are the most frequently citied sources of expected retirement income. Let’s take a look at potential sources of retirement income.

Retirement accounts. A 401(k), 403b, 457b, IRA, Keogh, or other retirement account is how many workers plan to primarily finance their retirement. Many Americans expect to rely on tax-deferred accounts when they retire, however, “statement shock” that confronts workers when they check their 401(k) statements and see major declines in the value of their savings, prompts many to investigate other options. Qualified retirement accounts are a great way to save for retirement, but, as you approach retirement careful planning should be given to converting some of those accounts into an income stream that will last for the rest of your life and to do so in a tax smart manner.

Social Security. Many Americans expect Social Security to be a major source of retirement income.  There is increasing pessimism about social security because of inadequate funding and increasing government deficits for social welfare programs. The solvency of Social Security is a perennial debate among economists and politicians, but very little is actually being done about it.  The most important consideration is whether social security will provide adequate income to provide the lifestyle you want in retirement.  If not, then where do you find the remaining income that you will need to sustain you for the rest of your life. Part of smart planning is to consider the options of when to begin collecting Social Security benefits.

Stocks and Bonds. Some Americans are expecting to rely on dividends from individual stocks, bonds or stock mutual funds in retirement.  Unfortunately these dividends can vary and are not guaranteed for life.

Savings. There has been a resurgence of interest in completely safe savings vehicles such as certificates of deposit and savings accounts.  Many Americans expect to rely on these FDIC-insured accounts when they retire. Unfortunately interest rates fluctuate and are currently so low that many retires have to tap into the principal to cover ordinary expenses resulting in a declining pool of money from which to draw income. Once the money runs out, the income stops.

Pensions. Consider yourself lucky if you still expect to receive a pension in retirement. This used to be a mainstay of retirement planning for many Americans but very few companies offer pensions and many of the railroad and civil service pensions have limited availability to newer employees. Most pensions have reduced benefits to the spouse if the pensioner dies before the spouse.

Rent and royalties. A book or a rental property can bring in income long after you leave the workplace. About 6 percent of Americans expect rent and royalties to help finance their retirement. Rental properties require management and maintenance, which can become increasingly cumbersome as you age. Covid has taught us that external factors can interrupt rental income. Many landlords were not able to collect rent from their tenants nor even evict them. So much for reliable rental income.

Inheritance. You could, of course, wait for your wealthy parents or relatives to help finance your retirement (and hope they don’t write you out of their will).

Part-time Work.  More and more “retired” Americans find that their income doesn’t meet their needs and have to find part-time work to supplement their income. More appropriately these persons might be categorized as “Part-Retired”.  Unfortunately, these part-time opportunities are often not in their field of competency and provide much less income then when employed in their specialty field.  Additionally, because of declining physical stamina, the reliability of continued income is limited.

Annuities and Insurance. More and more Americans are planning to rely on an annuity or some form of insurance product to finance retirement. Besides social security and pensions, insurance products are the only source of “guaranteed income for life”.  The guaranty is not from the federal or state government, but from the Insurance Company.  It is very important to select a financially stable insurance company that has the demonstrated track record of consistently paying claims.  Several rating agencies rank insurance companies for their claims paying ability and financial strength and outlook.  The four major insurance company rating agencies in the U.S. are A.M. Best, Moody’s, Standard and Poor’s and Fitch. 

Annuities have evolved substantially over the last few years and are now quite different from what Aunt Edna may have had in the 1960’s. In response to consumer demand, annuity companies have created a variety of products to fit almost any situation. No longer are annuities limited to an income for one person for life and then any remainder is forfeited to the insurance company. Today’s annuities are far more flexible and most are revocable. For a more detailed exploration of options available, with provision for legacy transfer to beneficiaries, while still offering guaranteed Income for Life, click here.

Universal Life Insurance is a type of flexible life insurance offering the low-cost protection of term life insurance as well as a saving component (like whole life insurance) which provides a cash value buildup. The death benefit, savings element and premiums can be reviewed and modified as the needs of the policyholder change. Benefits, while living, can be accessed, tax free, with proper planning.

Indexed Universal Life Insurance is a great way for you to supplement your retirement or other savings goals. IUL’s offer tax-deferred cash accumulation with NO market-based risk, tax-free income through policy loans and withdrawals, and tax-free death benefit protection for heirs. Indexed Universal Life is a great way to protect your savings from taxes while providing supplemental retirement income for as long as you live.

You are never too early to begin planning for retirement.  Contact us for a free analysis of your current financial status and suggestions as to how to make your retirement worry free and secure. Simply schedule a 30 minute phone consultation to begin the process.