By Jason Veinot
Roughly 10,000 Baby Boomers are retiring every day and will be for the next 18 years – and only about 15% have pensions.
That means that roughly 85% will be their own “pension managers,” and, unlike their parents, leaving money to their children will likely be a secondary objective.
For the most part, maintaining a steady income stream is a top priority.
With traditional pensions going the way of VCRs, and interest rates for fixed income hovering near 1%, how can older adults guarantee a steady, reliable income for their retirement?
First, a little background.
Income planning for retirement is made up of two parts: Accumulation and Distribution.
You have to first create a lump sum, then, once you retire, determine the best way to turn that nest egg into income.
Most people generate a retirement cash flow from two sources: Social Security and income from a nest egg.
The rule of thumb for managing a nest egg is to limit distributions to 4%, while investing in growth to allow the principal to keep pace with inflation.
When you also factor in increasing life spans, accelerating medical costs, and a vulnerable economy, the threats to your life savings and income is more critical than ever.
The question becomes how to sustain proper growth of your investments while protecting against potential loss.
If you look back at the past 30 years, the market has averaged 9.68% growth.
That sounds great until you look at the returns on a year-by-year basis.
The biggest danger to your income is having a negative market performance in the beginning of your retirement years.
If you start out a few years in the negative, it could crush your income potential for the rest of your life.
If you are relying solely on the market to reach your retirement and income goals, you are hoping not only to receive a strong average return but also to enjoy positive returns in the beginning years.
The problem is you can’t predict future returns, and you certainly can’t predict which years will be good for growth.
Therefore, rather than hoping for the best and living on “maybe” income, retirees are looking for a guarantee – a reliable source of income no matter what happens in the economy.
The best way to accomplish this is through an account that offers an “income rider.”
Income riders provide a guaranteed income just like a pension no matter what happens in the stock market.
Many of these accounts also will protect your principal and lock in gains along the way.
The most popular method for this type of account is through an “index annuity,” which is linked to the S&P 500 index.
An “income rider” can be implemented, guaranteeing a specific distribution amount for the life of you and/or your spouse.
For instance, an account may be guaranteed to earn 8% annually as you grow your nest egg. When you start withdrawing income, the guaranteed rate rate is 5%-6% annually.
In most situations, the annuity company will charge a small percentage (around 1%) for this benefit.
On a side note, one of the biggest threats to your income and savings in the latter part of your life can come from medical expenses.
Long-term medical needs can cost thousands of dollars a month, which can wipe out a person’s savings and income all too quickly.
To help prevent this potential danger, I recommend long-term care insurance once people reach age 60.
Securing your income is important, specifically for the long term.
You want to make sure your money can last as long as you do and that you won’t be in a position where you don’t have enough income 10 to 15 years from now.
Using a guaranteed income approach can help solve this dilemma.