05/05/2015
Turning Retirement Savings into Retirement Income
Chances are you know a retired couple like my friends Stewart and Ruth. Stewart worked his entire career as a school teacher in a single school district. Ruth worked more than twenty years as an administrator in a non-profit organization. Neither of them made a fabulous income, but it was steady and reliable.
Then, when they retired, their income continued essentially unchanged. Their employers each provide them with a pension check that will continue for the rest of their lives. As a result, Stewart and Ruth are able to take advantage of their free time and travel the country.
You and I, however, do not have the same advantages as Stewart and Ruth. By the time we were reaching the end of our working careers, traditional pension plans were much less common. Our employers provided a defined contribution plan, like a 401(k) or 403(b), where we were responsible for building our own retirement savings. Now that we have retired (or are planning for it), we wonder how to turn that retirement savings into retirement income.
One of the first things I did was I found one of the many retirement calculators available on the Internet. It asked me for some basic information. How much retirement savings did I have? No problem there. What rate of return do I plan to achieve on my money? Uh, I have a return I hope to achieve. How long do I expect to live? Huh, this isn’t going as well as I thought.
Here’s the problem: I don’t know what rate of return I will achieve. I don’t know how long my spouse and I will live. And if I mess this up, I don’t get a second chance.
Thankfully, I discovered something very helpful. Its name is a mouthful – a fixed indexed annuity with a guaranteed lifetime income benefit rider (say that five times fast!) – but it does exactly what I want.
What it does is provide me with a guaranteed amount that I can withdraw every year from my retirement savings for the rest of my life. There’s no uncertainty – I know the amount and I know that I can withdraw it every year for as long as I live or my spouse lives. The insurance company that issues the annuity guarantees it.
At the same time, I don’t have to give up control of my retirement savings. If at any time I need additional money or just find something else that I think is better, I can withdraw my remaining annuity balance. Naturally, if I withdraw more than I am supposed to in any given year, the amount that the carrier guarantees to pay me annually in the future is reduced. That’s only fair.
Now, thanks to that fixed indexed annuity with a guaranteed lifetime income benefit rider, my spouse and I feel as safe as Stewart and Ruth. When we receive our annual annuity check, we know that we can spend it, because another check just like it will arrive next year, and it will continue to do so for the rest of our lives.
