Six ways to ensure retirement income
Your savings may not be enough to provide an income in retirement. These six options offer alternatives that have the potential to last even longer.
There's nothing like having the peace of mind and security that comes from knowing you'll have steady income throughout retirement. Unless you're expecting a guaranteed pension, or know that your social security insurance (SSI) payments will be sufficient, there's little way of knowing you won't outlive your savings. Whether you're retirement age and have not saved enough or simply exploring your options, here are six ways that you can guarantee income in retirement.
If you or someone you know works for the federal government, you're probably familiar with pension plans. Pensions are similar to 401K plans in that employers match up to 25% of your contributions in some cases, but pensions also offer guaranteed income after retirement. The two most common types of plans are defined benefit (DB) and defined contribution (DC) plans. DB plans pay out a fixed benefit while payouts from DC plans are determined based on the investment's performance. Both plans will require that your tenure is extended in the period before retiring.
2. Social Security Insurance
As long as you've worked for at least 10 years and earn 40 credits, you'll qualify for SSI benefits once you reach retirement age (age 66 for most). In 2015, the IRS says that for every $1,250 you earn, you accumulate one credit and can earn a maximum of four a year. Credits never disappear even if you take an extended leave of absence and return to work or change jobs. Per credit earnings will rise with wage increases. Estimated by today's calculations, you would need to have earned at least $5,000 per year for 10 years, or $50,000 in wages to qualify for SSI.
3. Retirement and Investment Accounts
Even if the assets within your retirement portfolio (stocks, bonds, CDs, ETFs, etc.) have accumulated enough wealth that your annual withdrawals will meet your income needs, you should still make certain that your yearly returns can outpace inflation (averaging 3% annually). If not, you could suddenly find yourself having to live drastically below your means. For example, if at age 65 you have a nest egg of $1,000,000 and start taking annual withdrawals of 5% (or $50,000), you'd need an annual return of over 8% in order to replenish your coffers.
If you need the type of guaranteed income assurance that retirement accounts and investment portfolios cannot provide, then you need an annuity. Annuities guarantee a monthly or annual payout for as long as you're alive. There are two types of annuities: fixed income and variable income. With fixed annuities, the money you invest today is guaranteed a predefined payout. Variable annuity payouts are based on the performance of your investment (if gains are realized, payouts will be higher). Payouts can begin at whatever age you choose, and continue for the rest of your life, or for a predetermined term.
5. Reverse Mortgage
A reverse mortgage is a type of home equity loan which pays out an annuity-like cash stream based on your home's accumulated equity. Typically, reverse mortgages are reserved for borrowers age 62 or older. The money borrowed can be paid out as one lump sum payment, or issued in installments for the life of the loan. But reverse mortgages are known for their high fees and aren't always a good deal, especially if you wish to retain or pass-on ownership of your home.
6. Longevity Insurance
Longevity insurance is an insurance contract that guarantees the money invested today will generate payments in retirement. As with other forms of guaranteed income, the longer you wait to start taking payments, the higher annual payouts will be. These products allow investors to make a lump sum initial investment (or smaller amounts over time) in order to receive guaranteed payments later. For example, if a woman aged 45 invested $50,000 today, she could start taking payments at 65 and receive roughly $7,650 in annual income for the rest of her life.
Of course, the best approach to retirement income is generally asset diversification. The more income streams you can draw on, the less likely you'll be to ever run out.