There are four major ways income can be obtained in retirement.
1. Social Security – This is the main source of income for over 63% of retirees. Some people do not think they have a choice of when to take Social Security and so out of a perceived necessity they take it at 62 or at full retirement age. The recent continuing resolution, passed November 1st 2015 made some significant changes for those who had options on when to take their social security. The most significant change was the elimination of the strategy called “File and Suspend”. What this did was when you hit full retirement age you could file for your benefit and immediately suspend it, letting your benefit grow at 8.5% per year until age 70, while still taking spousal benefits and getting some income. To learn more click on link “Social Security”. If you are turning 66 before May of 2016, you might still be able to qualify, and will need to consult an advisor.
2. Pensions – Most government workers, civil service and government employees, some manufacturing employees, and most union workers still have pension plans. Although companies are finding the cost of these plans to become unmanageable and some governments are defaulting, like Illinois, as they have underfunded pension payments for decades.
3. Investments and interest - Most Defined Contribution plans, like a 401(k), 403(b), or Individual Retirement Accounts, are designed and operated as investment accounts, and communication with savers is framed entirely in terms of assets and returns. Asset value is the metric, growth is the priority, and risk is measured by the volatility of asset values.
4. Annuities – Unfortunately they are not always used right and can be an expensive piece of your portfolio, costing as high as 4% annually in fees, making it necessary for you to get a 10% annualized return to maintain your principal. Here are the two most popular types:
- Fixed Indexed Annuity – There is generally a floor in return, a stop-gap. In addition, as with a variable annuity, there is a potential opportunity for gains if the stock market rises, since a fixed indexed annuity's return is also tied to the performance of a benchmark index, such as the Standard & Poor's 500.
b. Variable Annuity – You will pay several charges when you invest in a variable annuity. Typically, the charges range from about 3%-4% Be sure you understand all the charges before you invest. These charges will reduce the value of your account and the return on your investment. Often, they will include the following:
i. Surrender charges
ii. Mortality and expense risk charge
iii. Administrative fees
iv. Underlying Fund Expenses
Structuring a retirement to plan to devise income is tough but doable. There are a few strategies to look at.
1. Create an income ladder. Utilizing annuities with different payout lengths and times one can create an income ladder with guaranteed income opportunities and numbers creating a base of income. There are multiple ways the income ladder can be accomplished. One common way is splitting up about 20 – 30 percent of the overall investment portfolio into a Variable Annuity or more popular now a Fixed Indexed Annuity, and also about 10 percent into a Deferred Income Annuity. The Deferred Income Annuity can be bought in the clients mid to late 50’s, with income scheduled at 65 to 67 and at the same time utilizing the other annuity with a life rider on it and letting it grow, then implementing that into an income stream around age 80.
2. Utilizing a decade’s approach with the rest of the portfolio. Once there is a base income number then the pressure on your investments are lower. The investments can then be spread out to have some immediate liquid for emergency needs, and some in some interest heavy accounts with the rest in high equity accounts allowing for growth and pushing your assets further.
There are other ways to create an income ladder and it is a matter of finding what works for you. Do you need help with this?
Rodney Mogen, is the president of solveurpuzzles, a business focused company. Solve ur puzzles helps three groups: Small Businesses, Financial Advisors/Agents (fixed business only), and Local Government Entities. Rodney is also a small business coach focused on developing strategies for small business owners and helping them develop their own strategy and ideas to grow, sell, develop the way they want. He is focused on creating proper strategies for Advisors and business owners to assist them in their day to day duties by solving their puzzles.