Making Your Money Last Through Retirement
Retirement means different things to different people. You may have grand plans to travel and see the Seven Wonders of the Ancient World. Perhaps you want to retire and live in a condo on Miami Beach. Maybe you just want to live a very quiet life out in the country. Whatever your retirement goals may be, you will have a better chance of reaching them if you prepare for the future today.
Planning for retirement income is not something you do on the spur of the moment. It is always best to start early so you enjoy the benefit of compound interest on your retirement money. Just to illustrate the value of time and power of compounding, take this example. If you invest $10,000 and earn an average of 6 percent per year, it will take you about 12 years to double your money (rule of 72 ... 72/6 = 12) and have a balance of $20,000. If you do not withdraw any money for 24 years, your $10,000 investment will be worth around $40,000 when you begin making withdrawals. This example does not reflect any actual investment, and actual investment values will fluctuate. This example is intended to demonstrate mathematical principles and should not be regarded as absolute. Any decline in the market will result in the Rule of 72 becoming less effective as a tool.
How much income will you need in retirement?
Your lifestyle will probably be different when you retire compared to when you were working. However, you want to make sure it is different by choice and not because you have to cut back on your plans due to money. If you stay healthy, your monthly expenses will usually go down when you retire. Hopefully, your children are out on their own and you do not have to support them. Your mortgage may be paid off and you might lower your living expenses by moving to a smaller home. Your healthcare costs can, and probably will, rise as you age. With good planning for retirement income, you can anticipate your needs and the expenses you are likely to encounter in the future.
Guaranteeing income for your future
Counting on a monthly Social Security check to provide you with the income you need when you retire may not be enough. In addition, the percentage of people that have a traditional pension plan to supplement their retirement income has been steadily declining. If you want to help ensure that you will have enough income throughout your retirement, you have to take charge of your own future. Money for retirement can be thought of in two ways. There is the money you are willing to risk and invest for capital appreciation and then there is the money you use to provide income. For many people, annuities fit the second category and provide a way of guaranteeing they will have income when they retire.
Annuities come in many different forms and are used for many different purposes. They allow you to set aside any amount of money (subject to a certain minimum amount) today and receive regular monthly payments starting at a future date. Both fixed and fixed indexed annuities can provide you with guaranteed retirement income.
A 42-year-old man could purchase a deferred annuity with a payout date that coincides with his planned retirement at age 67. Over those 25 years, he will earn a contractually agreed to rate of interest. When he reaches age 67, he can elect to have a guaranteed stream of income, which can be for the rest of his life, his spouse's, or both.
If you are already retired and need income now, you do not have to delay your payout like a deferred annuity. You can buy an immediate annuity and start receiving monthly checks almost immediately (usually 30 days from your purchase date).
What should you do?
Planning for retirement income requires you to formulate what your needs and wants will be in the future. Do you have the proper insurance? Where will you live? Do you want to travel? While you try to answer these, and other questions, think about what it will cost to fulfill your future goals. Annuities can help provide the income you need through your retirement years.