Ways to Turn Retirement Savings into Income for Life
Casey Dowd
Updated
As the baby boomer generation reaches retirement age, many are concerned their savings will not last for the rest of their life.
According to the Society of Actuaries, a 65-year-old man today has a 41% chance of living to age 85, while a 65-year-old woman has a 53% chance of living to age 85. If the man and woman are married, there's a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90. With that being the case, it’s no surprise that many worry they will outlive their retirement nest egg.
According to TIAA’s Lifetime Income Survey, having guaranteed monthly income is becoming more and more important. Diane Garnick, chief income strategist at TIAA, offered these tips on how to turn your retirement savings into income for life.
Boomer: When will I know if I am financially ready to retire?
Garnick: There are three simple steps for knowing when you are ready to retire. First, figure out how much money you need each month to cover your basic expenses (food, shelter, clothing & healthcare). Second, speak with a financial advisor to see how much savings it will take to provide guaranteed lifetime income to at least cover those necessities. Finally, make sure you have sufficient savings for the fun and necessary additional spending you will want to have throughout retirement. These crucial steps to achieving retirement readiness ensure that you will have a guaranteed monthly income in addition to what you’ve set aside for retirement. That way, even after you retire, you will still have a steady stream of income on top of the financial cushion you’ve built up over the years. As it turns out, while most Americans know this to be a good strategy, many have yet to act on it. TIAA’s new Lifetime Income Survey found that 68 percent of respondents would choose a regular retirement paycheck that will last as long as they live over things like an unlimited lifetime airline ticket (9 percent) or a new car every year (9 percent); however, only one out of 10 survey respondents claim that they have purchased an annuity.
Boomer: What are some last minute strategies I can use to boost my retirement income?
Garnick: Before retiring, individuals should make sure they estimate their expenses in retirement and map out how much monthly income they will need in retirement. TIAA’s survey found that just 35 percent of people know how much monthly income they’ll have in retirement, while only 46 percent know how much they have saved for retirement altogether. Once you’ve familiarized yourself with how much you’ve saved, consider the benefits lifetime income could offer. An annuity can be a good, late-in-the-game option for those looking for that extra boost in monthly income.
It is also important to note that retirement strategies typically vary from generation to generation. For example, TIAA’s survey found that less than half of baby boomers plan to withdraw from their retirement accounts as a source of monthly income compared to 60 percent of Gen X and 62 percent of Gen Y who plan on doing so. Regardless of strategy, it’s crucial that individuals outline their plan as early as possible rather than rely on last-minute decisions to reach their retirement goals.
Boomer: With not knowing how long you will live in retirement, what assurance can we have that our retirement income will not run out?
Garnick: While many baby boomers (84 percent) plan to rely on Social Security for monthly income when they retire, that option is a little less certain for later generations like Gen X and Gen Y. Thankfully, annuities are designed to ensure retirees don’t run out of income during retirement by offering a guaranteed source of monthly income that they can rely on for as long as they live.
As the average life expectancy continues to increase, individuals are rightly concerned about outliving retirement savings. A reliable paycheck in retirement is a great way to safeguard against depleting retirement savings entirely. And while the future of Social Security is yet to be seen, individuals across generations understand the importance of lifetime income, with 55 percent of Gen Y survey respondents claiming they are open to contributing part of their savings to an option that will guarantee monthly income throughout retirement. Individuals across all generations understand the importance of lifetime income, but it’s imperative they take action to secure it for themselves.
Boomer: Is there a safe way to project how much I will earn on my investments?
Garnick: The safe way to approach your investment projections is to always assume a low-end return. That way, you put yourself in a stable position should any of your investments fall short. On the other hand, lifetime income options like annuities provide retirees with stability and consistency as they know exactly how much monthly income to expect. Annuities are one of the few investment options that offer a guaranteed return to individuals.
Boomer: What financial planning should we put in place in the case that something unexpected should happen?
Garnick: For starters, it’s important to carefully analyze exactly how much income you rely on leading up to your retirement and how you anticipate your spending habits to change once you do retire – this will lay the foundation for your expectations throughout your retirement. Most financial experts recommend that individuals should replace 70 to 100 percent of their pre-retirement income. When it comes to handling the unexpected once you are retired, lifetime income options like annuities can serve as a safety net in the event something unexpected happens. This way, if retirees need to dip into their lump-sum savings for an emergency, their budget won’t be thrown off too significantly since they still have that monthly income to rely on.
