Our working years are a time to grow a retirement nest egg—accumulating assets and investing them profitably. But with retirement comes a different challenge: converting our savings into a secure stream of income that will last the rest of our lives.
That’s not something to be taken lightly. With life expectancies steadily growing, the typical retiree could be looking at a retirement of 30 years or more, and making those nest eggs last will be the key to remaining financially independent.
In retirement, it can be wise to maintain at least some exposure to the market; over time, the growth that it provides can help keep you flush.
But the market, as we’ve seen this year, is subject to tremendous short-term volatility. And especially for retirees, that can lead to sleepless nights.
So rather than invest your entire nest egg in the market, a good approach is to use some of your assets to create a “floor.” The purpose of this financial floor is to help ensure you always have enough income to cover the essentials—food, housing, transportation, and the like.
Knowing that these non-discretionary expenses are covered can help to create a sense of stability and confidence. So how is this floor built? Many people start with Social Security and annuities.
Social Security is a perennial punching bag for politicians. But the fact is that the system is expected to remain stable for many years. (For background, check this article out.) The bottom line is that Social Security will very likely remain a meaningful component of retirement income for most Americans.
As we’ve noted in previous articles, Social Security actually lets you decide the size of your monthly check. By carefully planning when and how you file, you can increase the size of your monthly check and potentially the amount of your lifetime Social Security income.
Then there are annuities. With immediate annuities, also known as income annuities, you pay a lump sum of cash to an insurer in return for regular income payments until you die. The annuities start paying out right away.
With annuities, you are not paying for great investment returns, you are paying for peace of mind. Simply put, retirees favor annuities because they help to eliminate worries about whether there will be enough money to pay the bills each month.
Then there are good old bonds. While fixed-income yields are generally low these days, bonds may also have a place as part of a retiree’s financial floor. The key is to select your bonds carefully, avoiding those that are likely to be hurt by rising interest rates. Municipal bonds are one example of a fixed-income category where respectable yields can still be found.
Once you’ve built your floor, you can turn your attention to the rest of your retirement-income structure. This is the money that is earmarked for helping you truly enjoy your retirement, and we’ll discuss it in our next article. In the meantime, please don’t hesitate to contact us at 888.473.6931 with any questions about retirement planning.
