Many people today no longer have the benefit of depending on company provided pension plans to supplement their retirement income. The responsibility has shifted to the individual to utilize other financial vehicles to create enough savings to live a stress-free retirement.
In this episode of Money Script Monday, Adam illustrates how an annuity can be used to generate a guaranteed source of lifetime income.
Today, our topic is How to Live a Stress-Free Retirement.
The reason I chose this topic today is because the retirement landscape really has changed and evolved over the years.
For example, my father was actually a fireman. When he was working, he paid into a pension, and now pretty much all of his retirement income is supplied by that very, very good pension that he’ll never outlive.
Fast forward to today, my brother’s actually also a fireman, and the county he works for actually does not offer a pension, and they don’t even offer a match on the 401(k).
The savings is now on him and him alone.
The company’s not supplying as much, so it’s really up to us and these generations that are approaching retirement to really take it upon ourselves to make sure we live, again, a stress-free retirement.
Then vs Now
Let’s get into it here. Again, we’re going to compare then versus now.
As you can see here in the retirement income pyramid, is that pensions used to be the lion’s share of retirement income.
Like we said, you pay into a pension as a company-sponsored pension, and then they supply you an income.
Then, of course, you have Social Security which was a healthy chunk, and as you can see.
Savings used to be the smallest amount of retirement income for those maybe pre-baby boomers, and some of the early baby boomers.
Again, fast forward to now, and the generations that are retiring in the future, and some that are even retiring now, as you can see, their retirement income pyramid is actually inverted.
The pensions are a very, very shrinking portion of retirement income.
A study last year showed that only 31% of Americans will actually have any sort of pension, and the average is a little bit less than $10,000 a year.
So again, it’s going to be a lot more of our responsibility as workers to save for our own retirement.
Social Security will hopefully be there for most of us, but as you can see, savings will be the lion’s share of our retirement.
When we say savings, it’s not just the checking or savings account.
That’s your savings that are typically in a 401(k), an IRA, or some sort of professionally managed account that’s in the stock market or bond portfolio or mutual funds.
Okay, so that’s the then and now of the retirement savings pyramid.
Then = Assets
Now let’s talk about something that’s a little bit different, a little bit outside the box.
I’m going to go ahead and say a sentence that might make you think a little bit differently.
Believe it or not, there’s people that think assets ruin retirement.
And you’re probably thinking, “How is that even possible? I did so well stacking my nest egg, doing a really good job saving. I have all these assets. Now I’m ready to retire”.
But believe it or not, assets cause stress in retirement, reason being, like we said, those assets are typically still invested in the market.
When you’re money is in the market, you’re subject to some of the risks in retirement, and one of those major risks is stock market volatility.
Seeing the stock market go up and down can affect the income that you have in retirement.
Also, there’s a big fear of retirees, and believe it or not, about 60% of people in retirement or approaching retirement, actually fear running out of money more than they do death.
There’s actually a 50% chance that if you’re married, one of you, your husband or your wife, will live to the age 90.
So again, assets ruin retirement.
Now = Income
What we want from those assets is actually income, because income, if you ask me, would make for a stress-free retirement.
Picture yourself walking down to the end of the driveway in your slippers, pick up the newspaper, and on the first of every single month, you’ve got what we call mailbox money.
That paycheck comes every single month, on the first of the month, and that money is protected, and it’s there forever, and you will not outlive it.
If you were to pass away, your spouse would get that money as well.
Again, I would say that income makes for more of a happier retirement than assets because your stress level would go down.
Lifetime Income Annuity
Then the question is, how do we turn those assets into income in a safe and efficient way?
Well, the answer here is we create a lifetime income annuity.
An annuity is basically something that supplies you an income for life that you will not outlive.
One of the main ways to do that is to actually turn those assets into income by using an insurance company.
The insurance company would supply you an annuity.
And just so you know, there’s a lot of different types of annuities out there, so what I would recommend is working with a trusted advisor.
That trusted advisor can really pick the right type of annuity for you, whether you’re ready for retirement now, whether you want to defer five years and then start income, whether you want to do some late stage income planning, there’s all shapes and sizes of annuities.
Again, rely on a trusted advisor to help you decide what the best type of annuity would be for you.
When you send those assets to the insurance company, and as you can see, they would set up a stream of income that you would never outlive.
We are able to turn those assets into income.
I know this was a very 30,000-foot view, so that’s why we would recommend working with a trusted advisor, but just keep in mind that the savings is going to be a large portion of your retirement income.
So, it’s really on us to make sure we do a good job, not only saving during our working years, but turning those assets into income, and doing it in a safe way.