You protect your car, home, and your health with insurance, but are you protecting your retirement income? Generating income during retirement is paramount. However, a question I regularly get from clients is how to build retirement income.
With potential for tax-deferred growth and generating a guaranteed income stream, annuities can be important in helping meet your retirement objectives. In addition, fixed income investments can also meet those income needs.
Why Retirement Income Planning is so Important
When it comes to retirement income planning, there is no “one-size-fits-all” solution. However, there are some basic elements that nearly every plan includes. For more information on this topic, please refer to my previous article: “What is Retirement Income Planning?”
The Best Retirement Income Streams
Adopting a fixed income investment approach that focuses on the preservation of capital and income is imperative for people at or near retirement. Below are excellent retirement income sources:
Fixed income investing is a more conservative strategy where returns are generated from lower-risk securities that pay consistent and reliable interest. Since the risk is lower, the interest coupon payments are also, usually, lower as well. Building a fixed income portfolio may include investing in bonds, preferred stocks, and certificates of deposit (CDs).
Government and corporate bonds are the most common types of fixed-income investments. Unlike equities that may pay no cash flows to investors, or variable-income securities where payments can change based on some underlying measure (such as short-term interest rates), the payments of a fixed-income security are known in advance.
Many fixed income investors employ a laddering strategy that offers steady interest income through the investment in a series of short-term bonds. At maturity, the Income Specialist reinvests the returned principal into new short-term bonds, thus extending the ladder. This method allows the investor to have access to ready capital and avoid losing out on rising market interest rates.
Many people buy annuities as a way to supplement retirement, providing them with a regular income stream after leaving the workforce. If you’re considering buying an annuity to provide steady income during retirement, it’s important to understand the different types and how they work.
There are two main categories of annuities, based on when they begin to pay out: immediate and deferred.
- Immediate annuities require the holder to give the insurance company a lump sum of money and start receiving payments right away.
- Deferred annuities allow you to accumulate capital while in the workforce, which can then be converted into an income stream later in life.
A fixed annuity offers a reliable retirement income source with relatively low risk. An indexed annuity combines the features of a fixed annuity with the possibility of some additional investment growth, depending on how the financial markets perform. Unlike an indexed annuity tied to a market index, the variable annuity provides a return that’s based on the performance of a portfolio of mutual funds that you have selected.
How To Build A Retirement Income Portfolio
According to the Social Security Administration, the average 65-year-old retiree can expect to live roughly 18–20½ years after leaving the workforce.1 However, with advances in healthcare leading to increasing longevity, it’s widely recommended that you plan for a retirement of 30 years or longer. Therefore, how you invest your retirement savings in retirement is crucial.
The portfolio allocation step is all about choosing the right mix of investments. It is important that this strategy be revisited and adapted over time.
This example employs an Investing for Income approach that preserves principal throughout retirement, although it might not be the best for your particular situation, so please talk to an Income Specialist before adopting this model:
Based on your age, your portfolio should be comprised of:
- Between ages 60 to 69: 50% (stocks) | 40% (bonds) | 10% (cash)
- Between ages 70 to 79: 25% (stocks) | 55% (bonds) | 20% (cash)
- Over age 80: 15% (stocks) | 55% (bonds) | 30% (cash)
Keep in mind that there is no single “right” approach. Therefore, it is important to stay flexible by adjusting your approach over time as your investment performance and life circumstances change. Choosing the right financial advisor, an Income Specialist that understands the unique needs of retirees, is a must.
- Social Security Administration, Actuarial Life Table, 2014. The average life expectancy for a person age 65 is 17.84 years for males and 20.44 years for females.