It’s time to make some important decisions.
Retirement is an exciting prospect – and it can be a daunting one. About five years before you expect your last paycheck to arrive is a good time to put a retirement income plan in place if you don’t have one already. Your plan will help clarify when you need income in retirement, how much you may need, and where you will find it. Here’s how to get started:
1. Develop A Retirement Timeline.
First, make a timeline that includes key dates. This will help you identify any gaps in income that you may need to fill. The timeline should include your:
Planned retirement age. Identify the age at which you plan to retire. For anyone born after 1960, the government considers full retirement age (FRA) to be age 67.1 However, recent research shows while most workers expect to retire at age a median age of 65, retirees report they retired at a median age of 62.2 So, consider your situation and timeline carefully.
Social Security benefits age. The amount of income you receive from Social Security will depend on the age at which you turn on this benefit. Under current rules, the earliest age at which benefits are available is 62. But that’s just a starting point. People who take Social Security at 62 typically receive smaller payments than they would if they waited until reaching their full retirement age. Those who delay taking income until age 70 typically receive a larger amount, though waiting beyond age 70 will not increase the benefit.
If you plan to retire before age 62, or you plan to delay taking benefits, consider how you will generate income until Social Security becomes available. Will you bridge the gap by:
- Withdrawing money from your savings?
- Taking interest and dividends from your investments?
- Generating a guaranteed stream of income for a specific period or a lifetime?
Medicare benefits age. Medicare provides health insurance for people ages 65 or older. If you plan to retire before age 65, then you may need to pay for health insurance until you are eligible.3 Consider how you will cover the expense. Will you rely on:
- Savings in a health savings account?
- Withdrawals from your retirement savings?
- Interest from investments, potentially a multi-year guaranteed annuity (MYGA)?
2. Draft A Retirement Spending Plan.
Evaluate your current spending to help determine how much income you will need to cover your essential expenses in retirement. Write down how much you spend now and estimate how much you may need in retirement. Record your:
Fixed (Essential) expenses. These are recurring costs such as housing, food, transportation, utilities, taxes, and so on.
Variable (Non-Essential) expenses. These are variable expenses like vacations, entertainment, and hobbies.
Will any of these expenses change after you retire? Can you eliminate any expenses? Will you have new ones? Remember, this is an early plan. You have time to refine it.
3. Identify Potential Sources of Income.
Retirees generate retirement income from a variety of sources. Some will provide variable streams of income and others will provide guaranteed streams of income.
Guaranteed income sources: Social Security benefits, pension plan payments, and annuities. Many retirees prefer to cover their essential expenses with income from guaranteed sources to ensure they’ll have what they need to live. To generate enough guaranteed income, retirees may need to supplement Social Security with other secure sources of income. Annuities can provide a stream of guaranteed lifetime income and the peace of mind that comes with it.
Variable income sources: Interest, dividends or principal withdrawn from investment, retirement, or savings accounts. Be aware that some types of retirement accounts have penalties if distributions are taken before a certain age. Make sure you know which accounts have penalties and when they can be accessed penalty-free.
Annuities Offer Guaranteed Income – And A Lot More
Annuities can help retirees solve a variety of thorny issues, including protecting assets from market volatility and providing a “personal pension” to help fund retirement. For example, adding an annuity to a diversified investment portfolio can:
- Increase the amount of guaranteed income available in retirement. A fixed index annuity (FIA) can provide a set amount of income over a specific period or a lifetime (in some cases with the option to have that income rise over time to offset the effects of inflation.)
- Manage investment risk. Retirees face a daunting risk just before and soon after they retire. It’s called sequence of returns risk, and it is the chance that a market downturn near retirement will reduce the value of a portfolio by so much that it is not able to generate enough income for a retiree to live comfortably throughout retirement. As a result, they may have to delay retirement or work during retirement instead of retiring as planned.
Adding a fixed index annuity to a portfolio can help lower sequence of returns risk. FIAs give owners the opportunity to participate in the performance of a stock market index, while providing complete protection from market losses. FIAs often are used to supplement or replace bonds in retirement portfolios. FIAs also can deliver efficient, guaranteed lifetime income through optional living benefits. - Help early retirees meet healthcare costs. For people who retire before age 65, a multi-year guaranteed annuity (MYGA) can help pay insurance premiums until age 65 when Medicare becomes available. These annuities are simple, CD-like products that offer compelling interest rates and complete principal protection.
When you’re five years from retirement, developing a retirement income plan should be at or near the top of your to-do list. If you have questions about how modern, commission-free annuities can help you manage risks in retirement, contact your financial advisor or reach out to a DPL Consultant at 1-877-625-5544. We can help.
1 “Retirement Benefits.” Social Security Administration. 2024. Cited July 28, 2024.
2 Retirement Confidence Survey, ebri.org.
3 Medicare Basics. Medicare.gov.
Guarantees are based on the claims paying ability of the issuing insurance company.
Fixed Index annuities are contracts purchased from a life insurance company that are designed for long-term retirement goals.