Guaranteed Income - Planning Early Could Help You Avoid Working in Retirement

My last article spoke about the second of seven gears of riches; Investing. The third gear is your Guaranteed Income.  Meaning, you need to be able to set your watch by how much money you will be collecting on a monthly basis. Planning for this early can help you avoid working to make up an income gap while you are retired.

When I study people with successful retirements filled with abundance and options almost all of them have certain things in common.

  • They carry very little, if any, personal debt
  • They have stable secure income from multiple sources that they can set their watch by every month
  • About 10 years before they retire they shift their assets out of riskier investments over to low to no risk income assets

First, your mortgage is generally the biggest debt most of us will have during our lifetimes.  Many people will argue that you should never pay off your house because that equity is tied up and not making you any money.  You might hear it suggested to borrow as much as you can now because interest rates are low.

I believe you can have the best of both worlds if you have a plan.  The first part of a mortgage plan is to try to pay it off before you plan to retire.  By adding small extra amounts that are directed to your principle every month you will take back-end interest, months, and even many years off of your payoff date.  Meanwhile, during this time, establish a home equity line of credit against your house.  When your house is paid off get the biggest equity line of credit you can get against your house.  This way, if you see an attractive investment opportunity you can still put your equity to use and if you don’t, you have removed the pressure of a big mortgage payment in retirement.

If you are able to pay off your mortgage early and you are still working, why not now shift that payment over to a solid savings or income product.  This could work out to tens of thousands of extra dollars stashed away and producing monthly income for you when you actually retire.

An abundant retirement is about strong positive cash flow that you can count on for years to come.  Here are some questions to consider about retirement and your planning strategy:

  • Do you have any idea how much money you need to retire every month?
  • Do you know where you can get that income from?
  • What happens if you should need home health care or long term care?  Do you have enough money put aside to take care of this need?
  • Are you protected from big market downturns during your retirement years?
  • How much will inflation eat into that monthly income needed?

All of these questions need to be looked at and then implement an income plan.  We do these for clients all over the country and you need some basic information to do a proper calculation.  First you need to know how much income you and your spouse will be receiving from Social Security when you retire.  Go to www.ssa.gov  and input your name, etc. to get an approximate figure for both you and your spouse.

I know social security has many issues that need to be resolved and there are always people that say it won’t be around when they retire.  The truth is nobody really knows what will happen to it in the years to come.  My belief is that the program will be around for many decades to come but that the payouts will be lowered for younger workers of today.  We can only play with the cards we are dealt today so use that projection on your Social Security income as a baseline to start.  If you believe that number will not truly be your number than you better start putting more away and growing it safely and securely so you are rock solid for retirement.

If you need $5,000 per month minimum to retire and your SSI between you and your spouse is only going to be $3,500 then you have a $1,500 shortfall to fund every month.  There are many possibilities on where that shortfall might come from such as:

  • Pension.  Figure out how how much will that be when you begin to draw.
  • 401k or IRA. Determine how long could that account last if you need to draw $18,000 per year out to live on in retirement.
  • Real Estate holdings. You will need to decide if it is best to hold onto the property for rental income or if selling out and setting up another income stream would meet your retirement goals.

Find out if you will you have to pay taxes on the amount you take out of your retirement accounts.  If you have a 401k or traditional IRA the answer is “yes”.  If you kept your monies in market accounts and you lose 50% of your capital to a bear market, how long will that $18,000 per year last now?

As you get to be in the retirement danger zone (which is 10 years before your projected retirement) you need to start shifting assets away from market risk and over to guaranteed products.  The proper products not only guarantee the principle is protected but can also guarantee solid income growth year after year.  A solid fixed indexed annuity with a long term income rider might be a very good call.  There are several things you must know before you purchase any annuity.  A good place to start is an article I wrote on all the different types of annuities and how to purchase one that fits your needs.

A lifetime income rider* will guarantee that you have a certain amount of income (depending on how much you have in your annuity and at what age you start withdrawing) for you and your spouse’s life.  If you live longer your normal retirement funds might run out, but with a lifetime income rider that income stream is guaranteed regardless of what happens to the underlying cash in the account.  Also, if you have 5 to 10 years before retirement you have time for that income rider to grow.  Many income riders* offer 6% and more guaranteed growth every year.  When you purchase a 200k annuity many companies might offer a 10% bonus on your initial purchase price so your starting amount would be $220,000.   When you add compound growth at 6% over 10 years your income rider would grow to over $400,000.  Then you would start to draw your lifetime income at 6% of the $400,000 giving you $24,000 a year income for you and your spouse’s life.  Presto!  You have filled your income gap. If you had the resources to purchase another annuity you might get one with a cost of living clause in the income rider which would hedge against inflation eating your buying power during retirement.

Planning for an abundant retirement needs to start well before you are expecting to retire.  Get educated, make a plan, and execute the plan.  You must also understand that the best plans are flexible based on the twists and turns your life will take along the way.

Give yourself a target date and figure the minimum monthly income required to live comfortably.  Then have an income plan built for you by your financial advisor.

*Product and state variations exist
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