Until just a few decades ago, many retirees could count on retirement income from three primary sources. These included an employer-sponsored defined benefit pension plan, Social Security, and personal savings or investments.
Today, however, many companies have done away with the traditional “pension” plan, replacing it with defined contribution plans such as the 401(k). But, while these options can offer some nice tax-related incentives now, they do not guarantee income in the future.
Because of that, millions of retirees every year must decide how to convert their savings into a reliable income stream that will last for the remainder of their lives – which could be 20 or more years, given longer life expectancy now.
The good news is that, even with an uncertain stock market and a low interest rate environment, there are some steps that you can take to convert the money you have saved into a stream of lifetime retirement income.
How to Turn Savings into Income in Retirement
Saving money for “the future” is just part of what you need to do in order to ensure an enjoyable retirement. Another key component is making sure that you have enough money coming in each month (or year) to pay for your essential living expenses, like housing, healthcare, and food (and possibly also some non-essentials like travel and entertainment).
The process of doing so successfully entails three steps:
- Estimating future expenses
- Determining retirement income sources
- Filling in any income “gaps”
Estimating Future Expenses
The first step to converting savings to income is to come up with an estimate of how much cash flow you will need in retirement. Although you may not be able to determine an exact dollar figure, you can obtain a “budget” for yourself by going through your essential living costs, and then adding in any of the “extras,” like vacations, the purchase of a second home, etc.
It is important to keep in mind that some of your expenses may go down in retirement, but others – such as healthcare – are likely to rise. In addition, remember to factor in taxes, based on where you generate your income and withdrawals from.
Determining Retirement Income Sources
Once you have an idea of what your expenses may be in retirement, you should then determine all of the sources from which you will generate income. Here, for instance, you may qualify for Social Security Retirement benefits. You may also bring in cash flow from one or more of the following sources:
- Reverse mortgage
- Interest from savings or investments
- Rental property
Filling in Any Income “Gaps”
After getting an idea of your future income and expenses, determine whether there are any “gaps.” In other words, will you have more expenses going out than cash flow coming in? If this is the case, then you will have to fill these in.
One way to do so is with a fixed or fixed indexed annuity. These flexible financial vehicles can pay out a steady, ongoing stream of income for a known period of time – such as ten or twenty years – or they can even continue generating regular income for the remainder of your lifetime, no matter how long that may be.
With that in mind, not only can annuities provide you with a way to make up the difference between your income and outgo in retirement, but they can also offer you an “income floor,” or a known amount of cash coming in that you know you can count on – even if the stock market falls or interest rates become lower.
Annuities can be funded in a number of different ways. But one common strategy that many retirees use is “rolling” funds from IRAs (Individual Retirement Accounts) and/or employer-sponsored retirement accounts into the annuity.
Then, depending on the type of annuity you purchase, your income can begin to pay out right away (or within the next 12 months), or alternatively it can start at a time in the future that you decide upon.
Will You Be Able to Count on Income for the Rest of Your Life?
As you go through your potential income and expenses for the future, will you be able to count on a lifetime stream of guaranteed income in retirement?
If not, an annuity may be right for you.
But, before you make a long-term commitment to this – or any – financial vehicle, it can help to discuss your situation and objectives with a specialist. At Sooner Retirement, our mission is on educating consumers (and financial professionals) on how annuities work, and why they could be a good fit for income needs in retirement.
To set up a time to chat with an Sooner Retirement retirement income planning specialist, feel free to contact us by phone at (918) 938-7734, or you can send us an email by going to our secure online contact form. We look forward to hearing from you.