Know Your Income Options in Retirement
©Shane Flait 2010

Most retirees want a steady income relatively immune to market turn downs, but not outlive their income. At 65 you have some 20 years of life expectancy and with 50% living longer! Inflation has historically averaged 3% which cuts the value of a dollar by a 25% in 10 years.  

 To address market, longevity and inflation concerns, take a conservative approach to investing and withdraw income only to the extent that your portfolio’s real value keeps up with inflation.

 To strategize how you’ll produce your retirement income, realize the array of income options you’re presented with in retirement. Then choose which combination of income options suits you according to your aversion to risk and your remaining life expectancy.

 Your retirement income options are:

·        Social Security benefits

·        Pension income

·        Income from how your invest your savings

·        Working during retirement

·        Converting your home’s equity to income

 Social Security benefits and a company pension income are the two mainstays of retirement income for most people. If you have both then you assured of some income you can count on forever. Social Security has a cost-of-living-adjustment.

 Company pensions are becoming rare these days. Most don’t have a cost-of-living adjustment either.

For additional income, you’ll have to manage your invested savings to generate it. How you choose to invest this money and how much you withdraw for income will determine how long your money will last.

To maintain your portfolio’s real value and an income for life, you must minimize your withdrawals. It’s generally assumed that a 4% annual withdrawal rate should allow preservation of your savings principal. Higher withdrawals generally require higher investment growth. And higher growth comes at higher risk – that’s risk of market downturn.

One investment options for generating income takes systematic withdrawals of a portfolio roughly split between equity (stock) and income (bond) based investments. The equity can help your portfolio growth rate to increase your withdrawal rate. But the equity portion can leave you vulnerable to a significant market downturn. 

A more conservative approach uses an all-bond portfolio. Overall earnings may be less so your withdrawals must be less. And that should be less than interest earnings since you must reinvest some of the earnings to maintain the real value of your portfolio.

A further option would be to use an immediate annuity to guarantee you an income for life. However, a fixed annuity won’t adjust your income for inflation. So, you should use some other part of your portfolio for increasing value against the threat of inflation.

Don’t forget to consider making your home equity earn income for you. You can either buydown to free up equity to enhance your savings, rent out part of your home for income, or take out a reverse mortgage if you don’t intend on leaving your house as a legacy.

If your income is still too little, you can continue working – perhaps only part time. This can help you delay taking withdrawals on your savings.

Delay retirement for more income

Saving more money can only help you out later. Delaying taking retirement savings can increase what you can get because there’s more of it, and you’re life expectancy shortens with time.

Social Security benefits increase significantly for delaying to age 70. And that immediate annuity will give higher monthly payments for the same investment as you get older.

 Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com