Increase Your Retirement Income
According to Retirement Weekly
- Annuities may be considered a form of "reverse insurance" that generates income
- for a[usually] retired individual instead of money for beneficiaries;
- A life settlement involves the sale of an unwanted, unneeded, or unaffordable life insurance policy for a comparatively larger cash sum;
- A reverse mortgage essentially converts equity in an asset [one's home] into income;
- A structured settlement basically involves accelerating the collection of installment-type monies due the individual [such as a damages award] into a discounted lump sum;
- Post-retirement work is a job for compensation, for an employer or self-employed individuals, where the key may be the impact on Social Security benefits - income and health.
Social Security
Retirement benefits are based on the highest 35 years of earnings during a lifetime of work. If you are under the full retirement age and are collecting benefits, your benefit will be reduced by $1 for every $2 earned over $12,960.
Once you reach your full retirement age, you receive your full benefit. Pre-retirees significantly underestimate the length of their retirement years and how long their savings will need to last, according to a study released by Fidelity Research Institute.
This miscalculation will become increasingly problematic as the traditional guaranteed income sources of Social Security and defined benefit pensions begin to replace a smaller and smaller share of their pre-retirement income;' according to the research.Pre-retirees believe they will need to make their retirement savings last until an average of age 83. Yet, estimates today give a healthy 65 year-old man a 24% chance of living to at least 90 and healthy women a 35% chance of reaching that same age. This discrepancy highlights how many pre-retirees underestimate their life spans, and therefore risk outliving their assets.
The report, "Structuring Income for Retirement," notes that pre-retirees will face a widening guaranteed income gap, which, at a national level, is likely to be billions of dollars a year. The report analyzes the emerging income gap, assesses three retirement income building block options and introduces five guidelines (see page 8) to consider when structuring an income portfolio for retirement.
"Many of today's retirees have the luxury of knowing that even if they overspend in their early retirement years, they still have a broader safety net of guaranteed income sources to help them get through;' said Van Harlow, managing director, Fidelity Research Institute, in a release. "However, pre-retirees will have a much smaller net to catch them if they make a planning mistake, and even if they accumulate additional savings to compensate, they will still need to determine how best to structure their portfolio to reduce their personal guaranteed income gap.
The Institute's research found that fewer than one-third of retirees are concerned about outliving their retirement savings, yet the majority (61 %) admit that they have not made a formal calculation of how much they can afford to spend each month to prevent outliving their savings.
For those who have no idea how much they can afford to spend, the most popular reported income-planning strategy is simply to "live as they did before retirement and make adjustments later if necessary."
"For pre-retirees, over half (53%) of which are concerned about outliving their retirement savings, the "adjust as you go" planning approach will become even more risky," Harlow said. The Institute's report outlines how retirees can manage these risks and create a personally "optimal" retirement income stream by assessing combinations of three basic lifetime income options.
Once you reach your full retirement age, you receive your full benefit. Pre-retirees significantly underestimate the length of their retirement years and how long their savings will need to last, according to a study released by Fidelity Research Institute.
This miscalculation will become increasingly problematic as the traditional guaranteed income sources of Social Security and defined benefit pensions begin to replace a smaller and smaller share of their pre-retirement income;' according to the research.Pre-retirees believe they will need to make their retirement savings last until an average of age 83. Yet, estimates today give a healthy 65 year-old man a 24% chance of living to at least 90 and healthy women a 35% chance of reaching that same age. This discrepancy highlights how many pre-retirees underestimate their life spans, and therefore risk outliving their assets.
The report, "Structuring Income for Retirement," notes that pre-retirees will face a widening guaranteed income gap, which, at a national level, is likely to be billions of dollars a year. The report analyzes the emerging income gap, assesses three retirement income building block options and introduces five guidelines (see page 8) to consider when structuring an income portfolio for retirement.
"Many of today's retirees have the luxury of knowing that even if they overspend in their early retirement years, they still have a broader safety net of guaranteed income sources to help them get through;' said Van Harlow, managing director, Fidelity Research Institute, in a release. "However, pre-retirees will have a much smaller net to catch them if they make a planning mistake, and even if they accumulate additional savings to compensate, they will still need to determine how best to structure their portfolio to reduce their personal guaranteed income gap.
The Institute's research found that fewer than one-third of retirees are concerned about outliving their retirement savings, yet the majority (61 %) admit that they have not made a formal calculation of how much they can afford to spend each month to prevent outliving their savings.
For those who have no idea how much they can afford to spend, the most popular reported income-planning strategy is simply to "live as they did before retirement and make adjustments later if necessary."
"For pre-retirees, over half (53%) of which are concerned about outliving their retirement savings, the "adjust as you go" planning approach will become even more risky," Harlow said. The Institute's report outlines how retirees can manage these risks and create a personally "optimal" retirement income stream by assessing combinations of three basic lifetime income options.
- Lifetime Income Annuity (LIA) with fixed or variable payments -- These annuities provide lifetime payments to the purchaser, and therefore, represent longevity insurance.
- Variable annuity with guaranteed living income benefits for life, e.g. a Guaranteed Minimum Withdrawal Benefit (GMWB) -- Provides a guarantee of a minimum withdrawal payment for life with growth potential to increase future payments, while the annuity holder maintains some access to their account value and the potential to leave some bequest if they die "prematurely."
- Traditional Systematic Withdrawal Plan (SWP) with investments in stocks, bonds and cash -- A traditional way of self-funding retirement through a strategic asset allocation to stocks, bonds and cash. The retiree draws from this portfolio "systematically" -- generally a percent of the total assets per time period -- while maintaining their chosen asset allocation mix.
Five guidelines for structuring a sustainable retirement portfolio
Through the development of a "Retirement Sustainability Quotient" -- a measure of the likelihood that a given mix of income products and assets will provide sufficient retirement income spending over time --the Fidelity report suggests five general guidelines for structuring a portfolio to successfully meet lifetime income needs.
- Retirement income plans should not only consider asset allocation -- among stocks bonds and cash -- but also "product allocation" that is, the possible inclusion of income products that can offer longevity insurance, inflation-hedging and assured payment streams.
- When income products are being considered, investors should clearly understand that there are trade-offs between guaranteed lifelong income and inflation protection versus such values as investment control, liquidity, fees and costs and the potential size of bequests to heirs.
- Those who have sufficient assets to sustain retirement incomes at very low rates of withdrawals may find that the additional longevity insurance they might gain by buying annuities or other income products costs more (in terms of much-reduced estates) than it is worth (in terms of minimally increased sustainability). Income products, in short, are not for all
- Those who need to draw higher percentages from their nest eggs may, by contrast, found that committing a portion of their assets to income products can substantially increase the sustainability of their retirement income plans -- albeit at the cost of reducing any possible bequests. If there is no need to plan for sizeable bequests, fixed annuities offer an attractive protection benefit. If there is a desire for more substantial bequests, variable annuities with guaranteed minimum withdrawal benefit (GMWB) features and traditional systematic withdrawal are more attractive.
- Retirement income plans have a core trade-off: higher income or bequest targets mean lower chances for success. Higher targets for income or bequests generally also suggest larger allocations to variable annuities with GMWB features or to traditional systematic withdrawal plan (SWP's) -- both of which offer possible equity appreciation that fixed income annuity products do not.