By Dennis Kagel, ChFC, Chartered Financial Consultant
When you retire, do you know how you will use the money you’ve saved? Especially if you are 55 or older—what is your specific strategy for using your savings to generate income during retirement?
If you answered no to either, you wouldn’t be alone. It appears that about one out of four workers in this age range answered “no” to the first question, and three out of four answered “no” to the second.
“It’s surprising that such a large proportion of older workers have failed to do this basic level of income planning when most are within 10 years of retirement,” said Matthew Drinkwater, Associate Managing Director, LIMRA SRI Research.
Among the three-quarters of workers who lack a retirement income strategy, by far the most common reason cited was simple procrastination: 42 percent simply haven’t gotten around to coming up with a plan. Nearly one-quarter also said they didn’t think they were close enough to retirement to create one.
Let me tell you this: If you’re age 55 or older, you’re old enough to need a strategy for developing income in retirement.
Another interesting finding from the study is that women are much more likely than men to avoid planning how they’ll use their retirement accounts (38 percent of women vs. 19 percent of men). But this is particularly short-sighted, since women usually live longer than men and need to make their savings last for a longer period.
Given the decline of traditional pension plans that pay you a lifetime monthly retirement income, learning how to generate retirement income from your 401(k) or other retirement accounts is one of the most critical retirement planning tasks facing workers today as they prepare for retirement. Here are two commonly used ways to generate regular retirement income from these accounts, each having many variations:
- Systematic withdrawals, where you invest your savings and use a method for withdrawing principal and interest over your expected lifetime. The disadvantage of this approach is there is risk involved, and if the market goes down, especially in the first five years of retirement, and depending upon how much you are withdrawing, it’s likely you will run out of money. Investors using low fixed-rate plans today (bank CDs, bonds, etc.) because they want a “safer” approach also run the risk of running out of money because it’s not likely that the interest earned will keep up with the withdrawals.
- There are plans available today that will contractually guarantee to pay you a monthly income for life no matter how long you live. The monthly amount is based on your age at the time you elect to begin withdrawals and the balance in your account.
Most people don’t have much control over their pay, but they’d likely jump at the chance to influence their income. So why not get motivated about your retirement income? During retirement, you have the ability to significantly influence the amount of your retirement paycheck through a studied choice of your options since each method of generating retirement income provides significantly different amounts. One very important thing is for sure: the earlier you get your money into option #2 (above), the longer it will have to grow at compounded interest rates (today we can get you into rates of 5½ percent to 6 percent in Income Accounts* that guarantee growth rates and lifetime payouts.)
There are good reasons for taking the time to learn about generating retirement income from savings. As Drinkwater noted, “Ultimately, our research has shown that people who take the steps to plan for retirement are more likely to feel more confident in their ability to be financially secure throughout their retirement.”
Give Dennis Kagel a call today at 309-454-9171 for a no-cost and no-obligation visit, and he can show you how to protect your retirement accounts from stock market risk involved with stocks, bonds, and mutual funds and how to establish a retirement plan that will make certain that you never run out of money. He specializes in providing that all-important second opinion of your current plan.
*Income Accounts are used to calculate a regular (monthly or annually) payout. The Income Account value is a true figure based on invested amount and annual interest rate of growth and is not available as a lump sum.
Sources upon request.
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