How to convert retirement savings into retirement income
Social security contributions are only around 40 percent of an employee’s average early retirement income. If, like most people, you don’t have a traditional employer pension, you have to pay the rest. As a rough rule of thumb, you need 80 percent of your early retirement income.
Let’s say you did the right things. You have used your employer-sponsored plan and invested money in your 401 (k), 457, or 403 (b) plan and invested it wisely. You’ve also invested in an IRA and maybe a Roth IRA.
How can you best convert some of your savings into guaranteed income? Many economists recommend retiring a significant portion of your retirement savings.
“Start by retiring enough of your assets so that you can meet 100% of your acceptable minimum income in retirement,” according to a 2007 study “Investing your Lump Sum at Retirement” by the Wharton Financial Institutions Center. “Pension insurance offers the only practicable way to achieve this security without spending a lot more money.”
Insure for longevity
A deferred lifelong annuity offered by an insurance company guarantees you a lifelong guaranteed income even if you live to be 100 years or older. Also called a longevity pension, it protects the financial risk of a long life. It’s like the opposite of life insurance.
You transfer your money to the insurer and receive guaranteed future income from a date of your choosing. Many deferred income annuity buyers choose to take payments when they turn 72, the same age you must start, Minimum Annual Payouts (RMDs) from a standard IRA, 401 (k) – or another qualified plan.
If you are funding your income annuity with qualified 401 (k) or IRA funds and want to delay payments beyond age 72, you must obtain a Qualified Longevity Annuity Contract (QLAC). A QLAC is a special type of deferred pension designed specifically for qualified pension funds. You can allocate up to 25% of the total of all your IRAs or US $ 135,000, whichever is lower, to a QLAC and defer RMD payments until the age of 85.
With any income pension, you know the exact amount of your monthly lifetime income and the exact date on which it starts. You can buy either an annuity or an annuity, which usually covers both spouses. It’s the most efficient way to protect yourself from your wealth surviving old age.
The insurer will invest your money for many years so it can top up until you generate an income. The longer you delay accepting payments and the older you start, the higher the monthly payout.
Your payments will continue to run even after the insurer has repaid your entire principal. Buyers who don’t live of old age subsidize those who do: that’s the insurance aspect.
People who need an immediate retirement income can choose an immediate pension instead.
Retirees with sufficient guaranteed income say they are happier. A pension can both create guaranteed income security and promote peace of mind.
Maybe you can do better than your retirement savings
If you have a traditional retirement plan, income starts when you reach retirement age and continues for the rest of your life. Is it child’s play? Not always. Sometimes a pension is a better choice.
When you retire, ask your employer about your lump-sum options and your monthly payments. Then you can get quotes from a pension provider who represents several pension companies. That way you can make a valid comparison.
An annuity is based on the same actuarial calculation as an annuity, with the exception of the insurer does take gender into account. (Pension plans can’t.) It can disadvantage women because they are expected to live longer, but it can benefit men.
If you go this route, you will need to convert the pension lump sum into an annuity IRA in order to avoid a high tax burden for distribution.
With an IRA annuity, you control when you start receiving retirement income. You can start receiving fine payments as early as 59Â½ or you can defer them until you turn 72, when you must start with the Minimum Payouts (RMDs) required.
Most retirement plans start paying out when you turn 65 when you retire. If you can afford to wait, your savings can increase significantly if you can get an additional seven years of tax deferral.
While most people opt for a lifelong pension, you can choose to have a period of time, such as B. 15 years, choose and receive more annual income. This can be a good choice for people who have other sources of income at a later date or who do not expect to reach old age.
Most retirement plans are solid, but some are underfunded. Most pensions are protected by the Pension Benefit Guaranty Corporation, but only up to certain limits. If there is reason to believe that your pension fund is underfunded, you can reduce your risk by deregistering.
A capital payout transfers the risks associated with investment success and longevity from the pension fund to the insured person. But then you can transfer that risk to a pension company through an IRA annuity.
You want to be sure that your insurer can meet its long-term obligations to you. You can easily find financial strength reviews from AM Best Company and other valuation services on the insurer’s website and elsewhere.
Annuity insurers regularly submit financial reports to the state insurance departments, which strictly regulate them.
In addition, state guarantee associations insure pensions up to certain maximum limits in the unlikely event that the insurer defaults. If you invest a lot of money in annuities, you can split it up among several insurers so that you are fully protected from the surety association.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-income, fixed-index and income-related annuities. In 1999, he started the AnnuityAdvantage website to help people find the best funded retirement options. He is a regular contributor to several leading financial websites on retirement income and retirement. A free quote comparison service with rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.