7 Smart Ways to Secure Guaranteed Retirement Income
Buy an Immediate Annuity
What’s the easiest way to achieve guaranteed income? Buy it. This is exactly what you do when you purchase an immediate annuity – you use a lump sum of money to purchase guaranteed income.
You can choose an option where the income will pay out for your entire lifetime or for joint lifetimes if you're married. The purchase could be the deal of a lifetime for aspiring centenarians! There's no way you can outlive your income with an immediate annuity.
As the name implies, "immediate" means the income starts right away, so the best time to look at this option is when you're ready to retire, and you want an income that will begin immediately. Exactly how much monthly income you can receive depends on your age. The older you are, the higher the income you'll get per dollar that you invest.
Use a Withdrawal Benefit Rider on a Deferred Annuity
If you want to purchase guaranteed income at some point in the future, look for an annuity that has a guaranteed minimum withdrawal benefit rider, sometimes called a GMWB, or a lifetime withdrawal benefit (an LWB)
With this type of investment, you deposit your funds today with the intention of taking out income at some point 10 years or more in the future. The annuity company takes a snapshot of your account value each year as you go along. As the account value grows, the new higher value is locked in as the new “income base.” You can use the larger of the current account value or the income base value to generate your guaranteed withdrawals when you activate your withdrawal rider.
The amount you can withdraw typically varies from 4 to 6 percent of the account value/income base value, with the exact percentage being dependent upon your age at the time of withdrawal and the terms of your contract.
Using this option can be a good way to protect account values from the impact that a major market decline would have if you're 10 to 15 years away from retirement, particularly if it should happen as you get nearer to your retirement age.
Work Toward Getting a Pension
It's great to retire with a pension. Some professionals spend the last ten years of their careers working at a government agency just so that they can get a pension. This is a smart move for those who didn't save enough toward retirement earlier in their careers. Look for employers that offer pensions and check to see what the vesting schedule is.
And if you're thinking about changing employers, you might want to wait a bit longer if working the extra time means you'll get more guaranteed income. These choices can help make your retirement more secure.
Some people worry that their pensions might not pay out all the benefits they were promised. The older you are when you start your pension, the more secure your income will be. There's a form of government insurance called the Pension Benefit Guarantee Corporation or PBGC. It protects pension benefits, but the amount that's guaranteed has a cap. The insured amount is reduced for each year you retire before age 65. If your pension is covered by the PBGC, begin benefits at 65 or later to maximize the insured amount.
Get a Reverse Mortgage
Guaranteed income is just that: income that's guaranteed for life with no risk on your part. A reverse mortgage can provide that level of security, and the income is tax-free. So why don’t more people use them? Two reasons: fear and fees.
First, people fear that the bank can take their home. This was true long ago, but regulations have changed dramatically in the last 30 years. This product is now safer, stronger, and less risky for the borrower.
Second, some people think that the fees are too high. Once again, regulations have improved this situation and fees today cannot exceed limits specified by the government. If you're age 62 or older, if you're looking for guaranteed income, and if you've paid off your home or have plenty of equity in it, a reverse mortgage might be a viable option.
Be Careful About When You Claim Social Security
Most retirees receive the largest portion of their guaranteed incomes from Social Security. Those receiving Social Security benefits get a cost-of-living adjustment each year, which usually results in an increase in benefits.
The problem is that most people still take Social Security too early, or they don't coordinate with their spouses if they're married. Hundreds of thousands of dollars of income that would be paid out in the form of spousal benefits and widow/widower benefits can be foregone because one spouse made an unwise decision about when to begin his benefits.
Don't be foolish and rush to claim Social Security at 62. Starting benefits at a later age will often deliver a better outcome for you and more guaranteed income over your lifetime.
Put Money in a Deferred Income Annuity or QLAC
Longevity insurance is a form of a deferred immediate annuity that will guarantee you a minimum amount of income at a specific future age, such as 85 or 90.
There's a special form of this product called a QLAC or Qualified Longevity Annuity Contract that's purchased inside an IRA or 401(k). The QLAC allows you to defer the start of your required minimum distributions.
People with longevity insurance feel more secure about spending their retirement money on fun and travel while they're younger because they know they have a future source of guaranteed income to provide for them later.
Build a Bond Ladder
Many retirees are afraid to spend principal, but it can be perfectly OK if it's structured the right way as part of a plan. You can build a bond or a CD ladder where you buy a CD or bond that will mature in a specific year in an amount you'll need at that time to cover expenses. When the bond matures, you spend it.
Another option is to use Treasury securities, which are considered to be one of the safest investments you can own. They're bonds issued by the U.S. government. Financial institutions can strip the interest portion of the bond from the principal portion, creating something called a Treasury strip. You can buy these strips with maturities that are laddered out, creating a guaranteed stream of income with each strip maturing in the year when you'll need it.