So far in this series, a pretty strong case has been made that planning for a guaranteed, lifetime income during retirement is more important than simply trying to accumulate savings. Now let’s talk about some of the options you have for creating this income, as well as the benefits and drawbacks each of the methods has to offer.
Stocks that pay a dividend can conceivably create an income for retirees. But there are no guarantees of what the dividends on a stock will be, which means you can’t exactly count on that as a regular, predictable income. Likewise, the stock’s value is exposed to market risk, which means your initial investment is subject to a lot of volatility.
Indexed annuities provide retirees with the option of a guaranteed lifetime income. Their values grow based on the performance of a chosen index (or indexes) but they’re designed to protect owners from losses in the market by having a minimum guaranteed interest rate (also called a floor), which locks in gains even when the market is headed down. It is important to make sure that you can afford to leave the principal untouched, as withdrawals can result in penalties and lower income payments.
Bonds can create a solid, temporary income but with the interest rate environment in flux, they expose retirees to both interest rate and reinvestment risk. Additionally, the income isn’t lifelong but stops once the bond matures. Finally, the income they provide isn’t guaranteed.
CDs are a popular instrument among conservative savers and their interest payments can be used as a post-retirement income, but the low interest rates they pay won’t generally keep up with inflation. Additonally, if you do get a high rate, once the CD matures you may have trouble reinvesting the principal for the same rate. There are also penalties should you need to withdraw from the principal before maturity.
This program offers you a small lifetime income that can go a long way toward creating security and stability in your retirement years. Best of all, there are ways to file that can increase the income and maximize your payout. One of the easiest ways to increase your payment is to make sure that you at least wait until full retirement age before taking distributions. If you wait longer, you can grow your payout even more.
A regular, reliable, lifelong income is exactly what a retiree needs to be able to relax and enjoy his or her retirement years. But it isn’t just about choosing any income-generating investment. It’s about choosing the right one in order to get that true sense of security.
In the next installment of the INCOME MATTERS series, we’ll talk about the many ways you can maximize your Social Security income. For more information about financial services that can help you, be sure to read about our financial services or contact us for more information.