A major retirement fear is running out of cash too soon. Having a steady stream of guaranteed income can curb the odds of retirement funds running low. Setting up guaranteed income can give you peace of mind that you will be able to cover any retirement financial shortfalls.
Retirees will need an abundance of guaranteed income to cover 20 or even 30 years of household costs in their golden years. “The greatest fear of retirees and near-retirees is running out of money in retirement,” says Robert Johnson, a finance professor at Heider College of Business at Creighton University. “This is exacerbated by the fact that human longevity is increasing.”
What Is Guaranteed Income in Retirement?
Guaranteed income is a steady and reliable flow of cash that a retiree can count on to cover some or even most household income needs in retirement. Funding that income is harder to do the longer you wait. The most effective guaranteed income streams are launched well before retirement age.
Here are eight moves you can make to build reliable streams of retirement income.
Guaranteed Retirement Income Action Steps:
1. Look at your retirement income needs.
2. Talk to a retirement savings professional.
3. Consider an annuity.
4. Leverage higher rates.
5. Look at dividend-paying stocks.
6. A reverse mortgage can be a last resort.
7. Maximize Social Security payouts.
8. Manage your expenses.
1. Look at Your Retirement Income Needs
Living on a fixed income in retirement is vastly different than living on a salary (or two salaries for working spouses) that includes bonuses, generous health care and employer-matching retirement plan contributions, among other career income perks. In retirement, you’re largely on your own, and that scenario will only grow more challenging if Social Security payouts are cut due to lack of funding by 2033
Consequently, it’s up to you to figure out your own retirement income needs, and the sooner the better.
“Income is a major retirement challenge, and we strongly encourage pre-retirees to begin shifting their mindset from retirement savings to retirement income,” says Bryan Pinsky, president of individual retirement at Corebridge Financial in Houston. “Chances are you’ve spent your working years receiving a paycheck every two weeks. You knew how much of that was going to be spent on essential expenses like housing, utilities, groceries and health care.”
Before the paycheck stops and retirement begins, pre-retirees need to figure out where their income will come from and how much income will be needed to sustain a suitable quality of life, Pinsky notes.
“We see many surveys that speak to the value Americans place on guaranteed income,” he says, adding that in Corebridge Financial’s Moving Forward study, 91% of respondents say they view products that provide income for life as valuable, and 34% say they are very valuable.
2. Talk to a Retirement Savings Professional
In the U.S., 57% of high-net-worth investors currently work with a financial professional, according to a recent Morgan Stanley survey.
These investors are most interested in guidance on issues directly related to retirement financial planning, with 87% looking for advice on retirement income, 87% also seeking asset allocation advice and 80% looking for aid on potential changes in tax policy.
As those numbers attest, relying on a trusted money manager can be a big help in figuring out one’s retirement cash income needs and strategies.
Yet from the retiree’s perspective, getting good financial advice from a financial professional really depends on the questions you ask — and get answered.
“The questions you ask a financial advisor when setting up a guaranteed income plan in retirement are important,” says Dana Cornell, CEO and founder at Cornell Capital Holdings in Olean, New York.
According to Cornell, the key questions a retiree should ask an advisor on guaranteed income strategy issues include the following:
— How much experience do they have with this type of strategy and process?
— How can we ensure the consistency of the income produced?
— What risks could arise that would throw off our income plan with this strategy?
— Can they explain the tax efficiency or inefficiency of the income stream?
“As retirees likely know, it’s not just about what we make after our working years but about what we keep,” Cornell says.
That’s where a good money manager can help.
3. Consider an Annuity
Income is an important retirement challenge that annuities aim to address. Used correctly, annuities can provide protected lifetime income for retirees.
Basically, annuities are long-term financial products designed for retirement. Withdrawals may be subject to federal and state income taxes. A 10% federal early withdrawal tax penalty may apply if taken before age 59 1/2.
Like any investment, both fixed and variable annuities may involve some investment risk, including possible loss of principal.
That’s why a candid conversation with a trusted financial professional needs to happen before any annuities are applied to your retirement portfolio. Even with some risk, annuities fill in a ton of blanks when planning a solid guaranteed retirement income strategy — especially these days.
“The last 18 months of market volatility have been a perfect case study for the value of annuities,” Pinsky says, adding that the 10-year Treasury yield has risen significantly over this time, allowing annuity providers to raise crediting rates and income levels for these products.
Annuities also seek to provide protection against down markets. “Steep negative investment returns at just the wrong time — either just as you’re getting ready to retire or just as you’ve begun your retirement — can do significant damage to your portfolio’s ability to generate the lasting income you’ll need,” Pinsky says.
4. Leverage Higher Rates
Given the rise in interest rates in the past year, annuity consumers can generate the same level of guaranteed income with less savings. That’s a big bonus for retirees looking for a regular and reliable check each month.
“While annuities always provide lifetime income protection, the amount of income varies based upon where interest rates are when you purchase the annuity,” says Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa. “For example, with today’s environment, a 65-year-old male retirement saver can generate nearly $7,000 per month for $1 million in savings.”
[READ: How to Save $1 Million.]
5. Look at Dividend Paying Stocks
While no stock market security meets the definition of “guaranteed income,” dividend-paying stocks that pay out regularly are close and thus deserve consideration by income-minded retirees.
“I’m a big believer in investing in dividend-paying stocks for income and think their consistent cash flow payouts make them a wonderful alternative to bonds,” Johnson says.
Don’t rush into a dividend-paying stock hunt, though. There are factors to consider before filling any “buy” orders, he says.
“Investors should seek out companies with attractive dividend yields, and companies that look to be well-positioned to continue those payouts into the future,” Johnson says.
The advantage of buying a stock that consistently pays a dividend versus a bond is that bond payments are fixed and don’t increase over time.
“Dividend-paying stocks not only have a cash flow but typically that dividend payment increases markedly over time. In addition, stock prices generally rise over extended periods of time,” Johnson says.
“Amazingly, these companies have all increased dividends for more than 50 consecutive years,” Johnson adds.
6. A Reverse Mortgage Can Be a Last Resort
A reverse mortgage can provide income in retirement for people who have liquidity in a home but haven’t saved enough cash for retirement. If you’re 62 or older, a reverse mortgage can provide guaranteed cash, and the ability to remain in your home may also have appeal.
However, keep in mind that the home can revert to the lending institution once you pass away or move out of the home.
Past that, there are different ways to access and unlock home equity for retirees, and reverse mortgages qualify.
“Not only can you use a portion of your home equity to access tax-free cash, but you don’t have to repay your loan until you leave the home or not comply with loan terms,” says Chris Moschner, chief marketing officer at American Advisors Group in Cincinnati. “This way, you’ll have the financial freedom and flexibility to design the retirement you want, whether that’s paying off bills, fixing up the house, traveling or helping your children.”
7. Maximize Social Security Payouts
That’s not advisable, as the idea is to have multiple income sources in retirement to maximize monthly household income. Still, Social Security has its benefits — literally.
For example, Social Security beneficiaries enjoy regular cost-of-living adjustments that generally boost payouts each year. For example, the most recent Social Security COLA hiked monthly payouts by 8.7%, starting in January 2023.
However, taking Social Security early, at age 62 or so, can significantly reduce payouts in retirement.
“If you start to get benefits at age 62, we’ll reduce your monthly benefit 30% to $700 to account for the longer time you receive benefits,” according to the Social Security Administration. “This decrease is usually permanent. If you choose to delay your receipt of benefits until age 70, you will increase your monthly benefit to $1,240.”
Consequently, waiting until age 70 to claim Social Security and coordinating benefits with a spouse can help you to maximize your guaranteed payment in retirement.
8. Manage Your Expenses
One last important step in your retirement guaranteed income campaign is to be candid about the amount of money you’ve saved for retirement. Take the same approach with your expected expenses in retirement.
That way, you know where you stand and can build a realistic, yet still effective, guaranteed income retirement stack.
“Most people are aware of the fixed costs in their budget but underestimate travel, medical expenses, dining out, spending money on kids and grandkids, among other big spending issues,” says Brad Aham, a financial planner at Equitable Advisors in Boston. “Making sure you have flexibility in your income to handle these variable costs is critical, and guaranteed income strategies often will not provide that flexibility.”
Add inflation and its income-curbing powers to your guaranteed income strategy.
“While guaranteed income strategies can be comforting and useful, you’ll likely still need to own stock-based funds and ETFs that can try to earn strong inflation-adjusted real returns over time,” Aham says.
Keeping some money in the stock market can complement your guaranteed income strategy. More people are living longer, and you don’t want to run out of money.
“This is where the guaranteed income strategies can really help,” Aham says.
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Update 08/18/23: This story was previously published at an earlier date and has been updated with new information.