One of the most crucial considerations when planning for retirement is ensuring you have a reliable income stream that will last as long as you do. Guaranteed income, such as that provided by certain financial products, can offer a sense of Security in retirement. But why is this so important?
Did you know that Americans who reach age sixty-five can expect, on average, to live until around age eighty-five? And that’s just the average. You probably know at least a couple of people who’ve lived into their nineties or longer. William J. Kole, longevity researcher and author of “The Big 100: The New World of Super-Aging ,” says that by 2034 the number of Americans who are 65 and older will be greater than the number of those 18 and younger for the first time in our history.
Today, about one out of every three sixty-five-year-olds will live beyond age ninety, and about one in seven will live past ninety-five. If you plan on retiring in your sixties, as many people do, your retirement savings might need to last for three decades.
When planning your life after work, you should never forget that living costs will increase over time. For example, if inflation averages just 2.6% per year, your living costs could double in less than 25 years. That’s a lot of pressure to place on a traditional retirement portfolio.
Inevitable increases in the cost of living and the inability to know precisely how long you will live mean that guaranteed income streams are invaluable. Having at least one additional source of dependable, predictable income can help ensure your financial stability and reduce anxiety about outliving your savings.
Social Security alone probably won’t be enough.
For most Americans, Social Security plays a critical role in their retirement planning. Unfortunately, Social Security retirement benefits replace only about 40% of pre-retirement earnings for lower wage earners and even less for those earning over $100,000 annually. Clearly, Social Security alone may not be enough to meet your essential expenses when you stop working.
You must fill a significant income gap, especially if you want to maintain a particular lifestyle.
One option for ensuring you have enough income to meet your retirement needs is to find part-time work. Working after retirement is increasingly common. Even people who don’t need the additional money take on part-time work to help them stay mentally and socially active. If you don’t like the idea of part-time work, other available strategies involve using specific financial vehicles to help you plug income gaps.
So, what are the best tools for creating reliable retirement income? Here are four options to consider.
1. Annuities are an effective income creation tool.
Income annuities are one of the most secure ways to establish a guaranteed income stream in retirement. An annuity is a contract between you and an insurance company. You can make a lump-sum payment or contribute over time in exchange for regular income payments that can last for your lifetime—or even for both you and your spouse’s lifetimes.
Annuities are popular with seniors because they provide a steady, predictable source of income and safeguard wealth against market fluctuations. You can also defer taxes on your contributions until you start withdrawing the funds. Income annuities are one way to supplement Social Security and help you avoid running out of cash before you die. While modern annuities have many benefits, there are some potential downsides, including limited liquidity and, in some cases, penalties for early withdrawals. If you are thinking about purchasing an annuity, it’s a wise idea to get advice from a financial advisor who has experience working with this type of safe money product.
2. You could design a diversified bond portfolio
Bonds are another option for generating retirement income. Bonds, particularly in a diversified portfolio, can provide a stream of income through regular interest payments. In recent years, rising interest rates have made bonds more attractive, offering retirees better yields than in the past.
A diversified bond portfolio could include U.S. Treasury securities, municipal bonds, and corporate debt securities. Bond income is generally lower risk than stock income but is still subject to fluctuations based on interest rates and credit quality.
Bonds can also provide liquidity, allowing retirees to make timely adjustments to their portfolios. However, it’s essential to be aware of the possible tax implications. Also, since their income streams are fixed, bonds don’t offer protection against inflation.
3. You might try the total return investment approach
A total return investment approach may appeal to those with a higher risk tolerance. This strategy generates income from interest, dividends, and capital gains in a diverse mix of stock and bond funds. Instead of focusing solely on a fixed annual withdrawal rate, you spend a portion of your overall returns each year, aiming to meet or exceed your needs over the long term.
A total return investment approach can be particularly advantageous in retirement as it allows your portfolio to continue growing, even while providing income. However, there’s no guarantee that funds will last for the entirety of your retirement, especially if your investments suffer losses early on.
4. Income-Producing Equities
Investing in income-producing equities can also provide a stream of dividends to supplement retirement income. Stocks that pay dividends offer the opportunity for both income and capital appreciation. Companies that consistently pay dividends can be a reliable source of cash flow, especially in a well-diversified portfolio.
However, dividend-paying stocks are still subject to market risks, and dividends are never guaranteed. To avoid unnecessary risks, you should only do business with companies with histories of robust earnings and consistent payouts.
Additionally, Real Estate Investment Trusts (REITs), which pay dividends based on income generated from properties they own, can be a valuable tool in a retirement portfolio. REITs offer exposure to real estate markets, providing more diversity in your portfolio.
Conclusion: How can you find your best income strategy?
Increased longevity and the rising cost of living make adding a guaranteed income strategy essential to retirement success. Annuities, bonds, or dividend-paying equities are some of the products available to help you create guaranteed, sustainable income that can last until you pass away.
Choosing the right investment mix depends on your risk tolerance, goals, and relationship with money. Partnering with a financial professional will help you craft a strategy that ensures your retirement income meets your needs today and in the future, while hedging against inflation and other long-term factors.
No matter where you are on your financial timeline, it’s a good time to evaluate your options and plan for a retirement that is secure, comfortable, and worry-free.
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