What will you do for income when you retire? While there are a lot of voices calling for us to save more for our later years, there may be too few calling for us to figure out — and even fewer actually helping us figure out — whether we'll have enough income when we retire.
In a recent article about “exploding” annuity sales, Time Magazine said the shift from defined benefit plans (traditional pensions) to defined contribution plans (401(k)s) has made figuring out how to generate lifetime income “perhaps the biggest retirement challenge of our age.”
In a related MarketWatch article, Economist and Nobel laureate Robert Merton said 401(k) plan sponsors and administrators are overly focused on the wrong goals. They are too concerned, he believes, with account balances and annual returns, whereas they should be more focused on helping workers understand how their balances will translate into retirement income.
Generally, there are three key sources of retirement income, along with two possible other sources. The big three are:
Social Security. Have you created a Social Security account so you can see your estimated benefits? Have you decided when to take benefits, learned about Social Security issues that are specific to women, and decided which of the various Social Security claiming strategies may make the most sense for you?
Employer-sponsored retirement plans. Do you know what you will do with your 401(k) plan balance upon your retirement? While doing a 401(k) rollover into an IRA can make a lot of sense, many people have made costly IRA rollover mistakes.
IRAs. Whether you have an IRA now or will have one after rolling a 401(k) balance into an IRA in the future, how to invest in retirement and turn a nest egg into income are obviously very important decisions. Our asset allocation guidelines are not just designed for the accumulation phase of life; they’re designed for retirees as well.
Our latest thinking on how to combine SMI strategies may be especially of interest to those nearing or in retirement, since our analysis shows taking a combined approach can lower risk while actually boosting returns.
The two possible other sources of retirement income are:
An annuity. As mentioned at the beginning of this post, annuity sales are booming. Our annuity advice? An immediate fixed annuity may make sense, as long as you only devote a portion of your nest egg to one. In addition, a deferred income annuity — also known as a longevity annuity — may be worth considering as a relatively low-cost way to manage the ironic-sounding “risk” of living a long life.
Continued employment. You may want to generate work-related income in retirement, but how realistic is the idea? An increasing number of older workers are counting on some level of paid employment during retirement. However, study after study have found that of the many retirees who thought they’d work at least part-time in retirement, relatively few actually do work. In many cases, health factors prevented their work intentions from materializing. The best advice may be to plan to work in your later years but not actually count on the income.
Clearly, there are a lot of pieces to the retirement income puzzle, and solving it is not easy.
We’d appreciate your feedback on this topic. Specifically:
How complete is your plan for generating/taking income in retirement?
To what degree has SMI helped you with this specific aspect of your financial life?
What other sources have you turned to for help with this?
What more would you like to see SMI doing to help you in this area?