A recent report by the Insured Retirement Institute shows that only 27% of baby boomers are very confident they will have enough money to see them through retirement. That fear is justified when you combine overall low levels of savings with forecasts for low investment returns in the years ahead. Still, there are ways to improve your retirement income prospects. Here are three relatively simple steps you should consider.
1. Get the most out of Social Security. Even though we’re living longer, 62 is still the most popular age for claiming Social Security, according to a Government Accountability Office report. But by taking benefits earlier rather than later, you may end up collecting a lot less than you otherwise could over your lifetime, putting teven more strain on your nest egg to maintain your standard of living.
Here’s a quick summary of what you need to know: Every year you delay claiming benefits between age 62 and 70, your payment rises roughly 7% to 8%, and that’s before inflation adjustments. If you’re married, you and your spouse may be able to ramp up your potential lifetime benefit even more than individuals can by adopting any of a number of claiming strategies.
One example: If a 62-year-old man who earns $100,000 a year and his 60-year-old wife who makes $60,000 both start taking benefits at 62, they might collect a projected $1.1 million or so in lifetime benefits, according to Financial Engines’ Social Security calculator. But if the wife starts taking her own benefit at 64, the husband files a “restricted application” at age 66 to take spousal benefits and the husband then files for his own benefit at age 70, they can potentially increase the amount they’ll collect over their joint lifetimes by almost $300,000.
Given the money at stake and the complexity of the Social Security system, you’ll want to rev up a good Social Security calculator or work with an adviser who knows the ins and outs of the Social Security program before you sign up for benefits.
2. Buy guaranteed lifetime income you can begin collecting immediately. If you decide you want more assured income than Social Security and any pensions alone might generate, you may want to consider devoting some of your savings to an immediate annuity. Essentially, you invest a lump sum with an insurer in return for monthly payments you’ll receive for as long as you live, even if the financial markets perform abysmally.
Today, for example, a 65-year-old man who puts $100,000 into an immediate annuity might receive about $550 a month for life, while a 65-year-old woman would would get roughly $515 a month and a 65-year-old couple (man and woman) would receive about $425 a month as long as either is alive. (This annuity calculator can estimate how you might receive for different amounts of money and different ages.)
The downside is that you agree to give up access to your money, so it’s not available for emergencies or to leave to heirs. (Some annuities provide various degrees of access to principal, but they typically pay less at least initially and often come with onerous fees.) Which is why even if you decide an immediate annuity is right for you, you want to be sure you have plenty of other savings invested in stocks, bonds and cash equivalents that can provide capital growth to maintain purchasing power and provide extra cash should you need it for emergencies and such.
3. Buy lifetime income you can collect in the future. If you don’t feel the need to turn savings into guaranteed income early in retirement but you worry you might run short of income late in life if your investments fare poorly or you simply overspend, you may be a candidate for a relatively new arrival on the annuity scene: a longevity, or deferred income, annuity. Like an immediate annuity, a longevity annuity provides income for life, except that you don’t start collecting payments until, say, 10 or 20 years down the road. So, for example, a 65-year-old man who invests $25,000 in a longevity annuity today, might receive $320 a month for life starting at 75 or $1,070 a month if he waits until age 85 to start taking payments. The idea is that you put up less money upfront than you would with an immediate annuity—leaving more of your savings for current spending—and by waiting to collect you receive a hefty payment in the future.
The rub? You could end up collecting nothing or very little if you die before the payments start or soon thereafter. (Some longevity annuities have a cash refund feature that gives your beneficiary any portion of your original investment you didn’t collect in payments before dying, but the payment is much lower.) This annuity calculator can show what size payment a longevity annuity might make based on the amount you invest, your age when you make the investment and the number of years you wait before collecting payments.
Buying a longevity annuity with money from a 401(k), IRA or similar account was pretty much a non-starter until recently because of regs generally requiring minimum distributions starting at age 70 1/2. But as long as the longevity annuity is designated a QLAC (Qualifying Longevity Annuity Contract) under new Treasury Department rules, you can invest up to $125,000 or 25% of your 401(k) or IRA account balance without having to worry about minimum withdrawals on that amount as long as your payments start no later than age 85. Just a handful of insurers offer QLACs today, but if the longevity annuity concept catches on, that number should grow.
There are other things you can and should do to make your savings last, ranging from smart lifestyle planning so you have a better idea of the expenses you’ll face in retirement to being more judicious about how much you pull from your nest egg each year. But the three steps above are certainly a good place to start.
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