Living on a fixed income during retirement years can be a difficult adjustment. Most retirees have to carefully budget monthly expenditures, while contending with the potential risk of running out of savings. A little planning today can secure a lifetime of income and let you make the most of your hard-earned retirement years.
At least 30% of transitions into retirement occur due to unplanned events such as health changes in aging family members or the workers themselves. Because of this fact, assessing your projected income needs a decade or more before your desired retirement date helps avoid drastic shortfalls. Your assessment should consider required monthly expenses such as utilities, transportation, groceries, medical as well as quarterly or annual expenses such as taxes. Any long-term plan should also include an increase in costs due to inflation. As a result, most people still need at least 70-80% of their pre-retirement income level during retirement.
Those expenses will determine what your income requirements are, and they can be met in various ways. Lifetime income from Social Security will cover some, as will a pension if you have one. Purchasing an annuity is another way to provide lifetime income. The remaining income will need to come from your personal savings, investments and retirement accounts. What do your current retirement savings look like? Do you have a TSP, 401K, or IRA and how much is in those accounts today? Start by calculating the future value of your savings using your preferred tool – ours can be found here. Using a conservative rate of return on investments during the retirement years will show you if there is risk of your account values reaching zero.
Do you know how much you will be receiving in social security benefits based on a planned retirement date? Most actuaries predict a 25% reduction in new social security benefits for everyone starting their claim in 2037, so if you are under age 50 right now, this prediction probably affects you. Even so, it is still extremely important to carefully consider when to begin taking social security, as that start date can drastically affect the amount of monthly income you and/or a surviving spouse would ultimately receive. You can create an account with the Social Security Administration and check your projected benefit level here.
If guaranteed pension benefits, estimated social security income, and 4% distributions from qualified retirement accounts are not enough to offset 70-80% of pre-retirement income, look at ways to reduce debt, eliminate spending, and expand your allocation to investments which provide income.
Be sure to look at the effect taxes will have on your retirement savings. Looking at your current savings in terms of pre-tax and after-tax investment, helps to identify the tax impact of drawing from each type of account. Does your portfolio include both tax-deferred and after-tax investments? An all pre-taxed savings portfolio may leave you with a large tax bill every year throughout retirement and cause up to 85% of your social security income to be taxed.
As you near the end of your working years, your investments should typically get more conservative. If you assess any income gaps or a future distribution from retirement accounts which results in a zero balance, consider an annuity to fill the void. Navy Mutual’s fixed annuities are conservative investments which provide a high level of safety and are funded with after-tax dollars. At the completion of a contract, they guarantee a return of your principal deposit as well a pre-determined rate of growth. A deferred annuity grows after-tax premium contributions until the owner is ready to receive the accumulation value as a lump sum or in a series of guaranteed income payments. A lump sum distribution can substantially increase taxable income level in that single year, so owners will often exchange into an immediate annuity to spread out income taxation. The income distribution could be elected to a fixed period in time to fill a specific temporary income gap, or for the entire lifetime of the annuitant. Lifelong immediate annuities spread out income taxation, create a floor of income which cannot be outlived, and reduce the risk of portfolio failure.
We’re here to help. If you are interested in an annuity and want to know what option may be best for you, schedule an appointment with a Navy Mutual representative.