Does Your Retirement Include Guaranteed Income Streams?
Updated: Oct 5, 2020
As you venture closer to your retirement milestone you may consider what proportion of living expenses will come from guaranteed retirement income. After planning diligently, you likely have a mix of income sources to draw on during retirement. Non-guaranteed income sources may even make up the majority of your income stream if you have spent your working years prioritizing building wealth.
Having a solid financial plan to utilize both guaranteed and non-guaranteed income will allow you to sleep better at night.
Guaranteed income is fixed income, meaning it’s money you can depend on receiving for the rest of your life. It comes from sources including: social security, pension payment, and annuity payments.
Social Security is an important social welfare system in the U.S. for retirement income. You and your employer pay a portion of each paycheck you earn into the social security system. The benefit amounts you’ll be eligible to claim are based on the earnings reported to the Social Security Administration and the time you elect to begin your benefits. Once you start filing, social security will pay you a monthly benefit for the rest of your lifetime.
Have more questions about Social Security? Read more in Answers to Your Top Social Security Questions.
Pension payments come from working at a company or government entity for a long period of time and in return, once you retire, the company pays you a regular monthly income. Although becoming more rare, some folks in the private company sector still have traditional pensions.
Today, pensions are more likely to be found for teachers and federal employees. Later this month, I’ll be sharing some information valuable for individuals part of the State University Retirement System (SURS) or systems similar to SURS.
An annuity is a contract between a person (or married couple) and a life insurance company. You can purchase an annuity with a portion of your retirement savings in either a single payment or with multiple payments, depending on the type of annuity. Annuities can ensure that your retirement income is steady even when there are downturns in the stock market. No matter how your other investments perform, annuities can provide you with a source of protected lifetime income.
Contact your financial advisor or insurance provider to learn more about how an annuity could become one of your retirement income sources.
Use guaranteed income to support your basic needs.
For retirement planning purposes you may want to consider allocating the funds from social security, an annuity contract, or a pension payment to meet your basic needs such as rent or mortgage, utilities, health insurance, and groceries.
Non-Guaranteed (yet predictable) Income
Non-guaranteed income is variable income, meaning it’s money you invested throughout retirement (or inherited) with the intention of withdrawing from throughout retirement. It is income that’s subject to market changes and is not guaranteed to last indefinitely. This income may include: planned withdrawals from 401k or mutual funds, dividends paid by stocks, appreciation of stocks, interest paid on bonds or from a bank account, and rental property income.
Just because income isn’t guaranteed, doesn’t mean that it isn’t reliable. These sources may also require closer management and planning.
Just because income isn’t guaranteed, doesn’t mean that it isn’t reliable.
If you have a company sponsored 401k plan, you may have significant wealth in mutual funds. The total value of a 401k will dictate the regular planned withdrawals from your 401k which can be used to meet basic needs or more lofty lifestyle goals such as travel or a grandchild’s wedding.
Financial planners recommend that withdrawals be modest, roughly 4% of the total value. For example, if your 401k has $1 million, you may withdraw $3,000 a month and potentially not run out of money. Modest withdrawals from a 401k can provide predictable retirement income.
Another source of income during retirement are dividends paid from stocks. One thing to look out for is when a company is paying out a large portion of its earnings as a dividend. If the company’s earnings drop, it may be forced to cut the dividend payout. If you want reliable dividend income during retirement, you should consider working with an investment manager or financial advisor to create a selection of stock across different industries ranging from communications to industrials to consumer stocks. That way if earnings or dividends are cut in one industry, your other dividends may still be flowing. The more diversified your dividend stock portfolio, the more reliable income you might expect.
Appreciation (Change In Value) of Stock
If you own a stock or selection of stocks that has gone up significantly in value, you might consider selling a portion of that increase to meet your living expenses. If you have a significant portion of your wealth in a single highly appreciated stock, selling a little bit each year not only allows you to pay living expenses, but you may wish to work with a financial advisor to take some of your ‘winnings’ and re-invest in a diversified portfolio of stocks to reduce the risk of losing your wealth if a single stock goes bad.
Interest Paid on Bonds or From A Bank Account
You may earn less income on government backed or investment grade corporate bonds, also known as ‘safer’ bonds, but your nest egg will be preserved. This might allow you to take advantage of an upcoming real estate correction and sleep at night knowing a portion of your wealth is safe. It is a good idea to keep money you will need for expenses during the next year in a savings account (even if earning little to no return) or short term Treasury bills.
Rental Property Income
Many families who have created wealth typically own various real estate properties. When well managed, real estate can generate substantial current income. This income may not be fully guaranteed, but if you have a diverse portfolio of investment properties without too much debt and a solid management team, you can probably draw a steady income during retirement.
Like an idea of the returns various investment vehicles offer today’s market?
At the time of this writing, $100,000 in IBM stock is paying around $5,200 a year or $100 a week in dividends. For comparison, an investment of $100,000 in U.S. government bonds (2 year Treasury notes) is paying $1,500 or about $30 a week. But, the IBM stock could be worth $75,000 tomorrow or $125,000. The value of stocks moves around much more dramatically than bonds. An investment in a stock mutual fund owning the largest 500 US companies (S&P 500) is paying about $1,850 a year or $35 a week.
If you need help aligning your retirement lifestyle spending with guaranteed and non-guaranteed income sources, please reach out to me today. Schedule a free consultation today. Having a solid financial plan to utilize both guaranteed and non-guaranteed income will allow you to sleep better at night.
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About the Author
Peter Newman is the president of Peak Wealth Planning. He offers financial planning, investment management, retirement income, insurance and estate planning advice. Peak Wealth is a fee only financial advisor based in Champaign, Illinois.