Investment Income for Retirement
Financial planners recommend that you do not take more than 4% per year from your retirement savings, in order to be sure that your savings will last the rest of your life. If you have saved $50,000 in your IRA, 401K and other accounts, this means you can start taking out $2,000 a year. In this way, the principal will last 25 years, plus you will have your accumulated interest to draw on. If you retire at age 65, the money will last the majority of people all of their lives. With interest rates so low, however, some financial planners have reduced the percentage to 3% a year, if retirees want to be absolutely sure their money will last. Three percent translates to about $1500 a year on $50,000 in savings. This is a fixed amount which you cannot increase, even if you experience financial problems as a result of inflation.
Another approach to handling your retirement savings is to re-evaluate every few years how much you can remove. In other words, start out taking only $1000 a year for the first five years. Then, gradually increase the amount as you age. To figure out how much you can take in later years, subtract your age from 100. Then, divide your remaining savings by that number. If you never take out more than that amount, your money should last the rest of your life (assuming you do not live past 100). For example, if you are 75, and you still have $38,000 left in savings, divide that $38,000 by 25. This comes to $1520 a year that you can remove from savings. When you reach 80 and have about $33,000, divide that amount by 20 and you can start taking $1650 a year from savings. This allows you to benefit from increases to your principle from the interest you have received, and helps protect you against inflation.
A third approach is to simply invest your money in the highest dividend paying stocks, Treasury bills, or bank C.D.'s you can find and simply use whatever interest you get, without ever touching your principle. However, if you choose a bad stock or interest rates dip (as they have over the past few years), you could end up with very little income. On the other hand, you maintain control of your principle, and you can pass it on to your heirs.
A lot will depend on how much money you have saved and how much you need to live on. If your current expenses are so high that you are tempted to use more than 4% of your savings in one year, it is very important that you downsize immediately or you will go through your savings much too rapidly.
Annuities to Supplement Your Retirement Income
Annuities are an entirely different way to handle your retirement savings. You turn your savings over to an annuity company and they pay you a fixed income for the rest of your life. In most annuities, the monthly amount is locked in. The amount you are paid is designed to pay you interest and use up your principle. There are different types of annuities. One popular example is the New York Life Insurance annuity that is promoted by AARP. With this annuity, if you do not collect long enough to at least earn back your original investment, the difference will be paid to your chosen beneficiary. Here are some sample payouts (in 2012) based on the age you are when you make the original investment:
Age 65 -- 5.8%
Age 75 -- 6.9%
Age 85 -- 8.1%
Based on these figures, if a 65 year old invested that same $50,000 in an AARP / New York Life annuity, they would immediately begin receiving $2900 a year in income. That is far more than the $1000 to $2000 a year they would pay themselves if they decided to manage and draw on their own savings. However, the amount never goes up. Another disadvantage is that you can only pass the money on to a beneficiary if you have received less than $50,000 in payments by the time you die. In other words, if you started receiving the annuity at age 65 and died at age 82, there would be nothing left to pass to an heir. Many people who collect an annuity feel that they should save a portion of the income they receive in the early years, to help with rising expenses in later years.
This is not meant to be an endorsement of the AARP / New York Life annuity. There are other annuities from other companies that offer different options, and some of them may work better for your needs. This was only meant as an example, so you can understand how annuities can help you handle your retirement income.
Annuities vs. Investment Income
There is no solution that is the correct one for every person. A great deal depends on whether or not you hope to leave money to a beneficiary, and how successful you think you will be if you handle your own money rather than turn it over to someone else. You also need to consider how much income you will need immediately upon retirement. Many people actually use a combination of two or more of these plans. Whatever you decide, it is good to have a full picture of the options available to you before you begin recklessly living off your savings during the first few years after retirement.
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