Those entering their golden years often get a nasty surprise: They don’t have enough money to live like they did in their working years. Even retirees with the best intentions fail to prioritize guaranteed income, which can lead to cash shortages.
If that sounds like you, you’re not alone. According to a study by the Morningstar Center for Retirement & Policy Studies, 45% of Americans who quit working at age 65 will run out of money in retirement. Demographically, 55% of single women will fall victim to cash shortages in retirement, as will 41% of couples and 40% of single males.
You can lower your odds of a cash crisis by increasing the number of guaranteed income funnels you have in retirement.
[Read: What Is a Good Monthly Retirement Income?]
Why Retirees Need Guaranteed Income
Guaranteed retirement income is just what it sounds like: an income stream after your working years. “Guaranteed income is about having sources of income that will come in every month without interruption,” says Chris Mediate, president of Mediate Financial in Canfield, Ohio. “Retirees need the income to ensure they will not outlive their needs and wants.”
While some risks are bigger than others, these common issues can thwart a comfortable retirement:
— Longevity risk. People are living longer, and retirees need a dependable income source that lasts as long as they do. “Running out of money is a major concern for retirees,” says Lane Martinsen, founder of Martinsen Wealth Management in Tempe, Arizona.
— Market volatility. “Guaranteed income offers financial stability, insulating retirees from market fluctuations,” Martinsen says. Investments such as stocks can be risky, especially during economic downturns.
— Rising costs. Fixed expenses like housing, health care and utilities often increase over time. “Having a predictable source of income helps retirees manage these rising costs,” Martinsen notes.
— Peace of mind. Guaranteed income can reduce financial stress for retirees. The ability to pay for essential living expenses without relying solely on market-dependent investments provides a sense of security, Martinsen says.
Identify Your Guaranteed Income Needs
Maximizing your guaranteed income is all about proper planning. Before retirement, review your budget and determine the amount of monthly income you’ll need to live comfortably in retirement. “It should cover your retirement basic expenses and the things you want to do or have,” Mediate says. “The sooner I know my number, then I can see where my current guaranteed sources of income are coming from, such as Social Security and a pension.”
Once you identify your retirement income sources, you’ll know if there’s an income gap. “When I have a known gap, I need to identify what financial sources I can use to fill it,” he says.
Aim for an Annuity
“Annuities are best suited for people who want additional guarantees to cover a retirement income gap,” Mediate says. “They like shifting the risk to the insurance company to guarantee payment and ensure they don’t outlive their money. After all, we insure our homes and cars; why not insure our income?”
Like any investment, fixed and variable annuities may involve some risk, including possible loss of principal. That’s why a candid conversation with a trusted financial professional must happen before annuities are applied to your retirement portfolio. Even with some risk, annuities fill in many blanks when planning a solid guaranteed retirement income strategy.
[READ: How to Build a Balanced Retirement Portfolio]
Lean on Stocks
The rewards outweigh the risks when establishing a sturdy retirement stock portfolio, but retirees still should be cautious.
Start by tying your investment strategy to your retirement goals. “You can have a bucket approach to generating income by dividing the portfolio into different buckets to meet the retiree’s income needs,” says James Yarbrough, a financial planner with Stonebridge Wealth Management in Greenville, North Carolina.
Additionally, you can create a stock portfolio built for growth in your later years or strictly for income. “Dividends should also play a vital part in generating future income without diminishing the principle of the portfolio,” Yarbrough adds.
It’s also important to look at your after-tax income when building a stock portfolio for retirement. “There is no benefit to paying more in taxes, having your Social Security taxed at its maximum and having your stock and bond portfolio taxed,” Yarbrough says. “That can reduce your retirement income.”
Maximize Social Security Income
Optimizing Social Security is another smart way to create a robust guaranteed income plan in retirement.
“Social Security is the income foundation for retirement,” Yarbrough notes. “It has an inflation-based Cost of Living Adjustment, or COLA, every year.”
Still, there are several variables to consider. “Unfortunately, many of those factors and variables involve making educated guesses about the future,” Yarbrough adds. “Knowing one’s PIA (primary insurance amount) and your full retirement age can be a big help.” You can find this information by checking your Social Security statement online.
One of the best ways to maximize your benefits is to delay retirement to the maximum year of age 70. “That way, the retiree can increase their benefit each year as they continue to work past their full retirement age,” he adds.
[Related:Reasons to Take Social Security Late at Age 70]
Explore Insurance Benefits
Some life insurance may offer supplemental benefits products that help people protect their family budgets.
“What supplemental benefits do is pick up the costs not covered by a major health insurance plan, such as deductibles, copays, the cost of a home health care aide or safety modifications to a home,” says Jim Szostek, vice president and deputy of retirement security at the New York City-based American Council of Life Insurers.
Test Your Retirement Budget
Retirees often spend more than they initially planned in retirement.
One way to know how well your retirement budget will hold up is to give it a trial run in the years before your retirement date. “This benefits in two ways,” Yarbrough says. “You will see what it is like to live on a reduced spending plan, and you will be saving additional funds while still working.”
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Guaranteed Income Strategies for Retirement originally appeared on usnews.com
Update 09/27/24: This story was previously published at an earlier date and has been updated with new information.
