The number one worry for most retirees is outliving their money. When worried, people make poor decisions. Having a plan in place before you retire, or even 10 years into retirement, will give you peace of mind. Take a look at where your income streams will be coming from, where you might be losing money, and ways to replace the income you will be losing to make sure that you will not only not outlive your money, but that you will be able to leave some money to your family.
Retirement Income: Buckets of Income
If you earn Social Security, it is guaranteed income for life that you cannot outlive. It is basically a government annuity. While timing and filing strategies can determine the amount of your, and even your spouses, check, once it starts, it will not stop until you pass. This is why it makes up a big chunk of so many retirees’ income; they know it will always be there.
It is important to note that the maximum check a person can receive is around $3,700, with the average check much lower than this, around $1,500. Many people can live off of this and many people cannot. Make sure you have a timing strategy for your check, especially if you are divorced or widowed, so you can budget for exactly how much you will be receiving.
While some retirees will have pension payments, many do not. In the 1970’s and 1980’s, the pension system shifted from deferred benefit plans to defined contribution plans, otherwise known as IRAs and 401(k)s. While Americans were given control over the investment of their retirement savings, they also assumed the problem of distribution in retirement.
If you do not have a pension, you can just ignore this section as it won’t factor into your retirement income. If you do, it is important to make informed decisions when it comes to choosing how you receive your payouts, especially if you are married. The annual private pension amount is around $10,000 while the average federal government pension is around $28,000. Even if you are in a the small percentage of retirees who still receive a pension, for most people, it will not be enough to live off of.
Like we mentioned, when pensions went away, retirement accounts like 401(k)s and IRAs became the main retirement savings vehicle used by Americans. Many people put most, if not all, of their savings for retirement in these qualified accounts. This is great and has allowed a lot of people to have a successful retirement.
The problem we run into with clients is that there is not as much spendable money in these accounts as people anticipate due to the fact that this money has not been taxed yet. Say you need $10,000 and decide to pull it out of these accounts. At least 25% is going to go to taxes, which means if you need $10,000 you are going to have to pull out around $13,000. When you make these withdrawals from IRAs or 401(k)s, you also have to count this money as income. If you have a higher income, you could even have to pay taxes on your Social Security check and tax on your Medicare (IRMAA) due to these withdrawals. It is important to have a plan for these accounts so that you are not saddled with a huge tax bill in retirement as well as ending up with less money than you expected.
Savings is pretty straightforward and is going to be any money you keep in a savings or brokerage account. Savings are great, but do not grow much. While it is important to have some easy money to access during retirement, if you are keeping the bulk of your money in a savings account, there are many steps you can take to make this money work better for you.
Insurance against outliving your money
As you can see, even with the above money streams, you might fall short in retirement, especially if you do not have a plan in place. There are ways to move money around, especially from retirement accounts and savings accounts, to put guarantees in place that you will not outlive your money.
Annuities would be the first option. Annuities vary a lot by the specific policy, but the main idea is that you are putting money into an account that then guarantees you checks for as long as you live, even if you outlive the initial premium. It would be just like the Social Security check you are receiving every month. Many annuities even pay a death benefit to your heirs if you do not receive the full initial amount deposited in payments. If the right product is purchased for the right person, annuities are a great way to guarantee not outliving your money.
One of our clients, Marie, is 71, widowed, and recently retired. Marie’s Social Security check is $3,000 monthly. Marie has been a good saver, having $750,000 in IRAs and 401(k)s. She wants little money at risk in the stock market because she can’t afford a large loss. We recommended Marie put her money into 3 buckets that would allow her to have a $50,000 check for the rest of her life. The first $250,000 we put in a managed savings account for her to spend down and live off of over the next 5 years. The second bucket of $250,000 we put into an annuity. The third bucket of $250,000 was put into a different annuity. If left for 5 years, both these annuities are guaranteed to pay Marie $25,000 yearly for the rest of her life. If she decided and was able to wait longer than 5 years, the benefit paid out would grow and be larger. If she does not drain the accounts from payments before she dies, the remaining balance will go to her heirs. Even if she drains the balance and is still living, she will still get the payments. This guarantees her an income she cannot outlive.
Putting the second and third bucket into different annuities gives Marie and us, as her financial planners, more choices, and allows us to make sure Marie is in the best possible financial position. Annuities are not for everyone, but for people wanting a low risk and a guarantee they can’t outlive their money. If you want protection against outliving your money, there is a good chance some type of annuity products could fit into your financial plan.
The second option you have to insure against outliving your money is a life insurance policy that has cash value. Basically, if done right, we can supercharge whole life insurance policies so you are able to pull money out of them tax-free when you need it. This is great because unlike retirement accounts, the money you pull from these policies will not count as income, so it will not affect your tax bill. They also come with the added benefit of leaving money to your heirs.