Retirement Planning
How Your Spending Changes in Retirement
Household spending generally drops at retirement and then continues to decline throughout retirement. Here’s how people’s spending changes the most and how it can effect your saving plan.
Planning for Retirement with Income and Assets
Published July 23, 2017
Early in our careers, we think about retirement in terms of assets, but as we get closer to actually retiring, it’s important to shift and focus on income. Why? Assets run out. Lifetime income doesn’t.
- There are three common options to generate retirement income
- It’s important to make sure that an income annuity is right for your financial situation
If you want to truly enjoy your retirement years, it’s important to be sure you’ll be able to continue living in comfort. By converting your assets into guaranteed retirement income, you can ensure that this is a given.
What are your options when it comes to retirement income generators? There are three common routes people take:
- You could invest your savings and live off the money from the interest and dividends;
- You could invest your savings and take out systematic withdrawals;
- Or, you could enroll in the Personal Pension or purchase an income annuity that will provide you guaranteed lifetime income.
As the retirement landscape changes, self-insurance is the idea that people are insuring themselves against longevity risk. Longevity risk is the risk of living longer than expected and not having the savings to support it. The growth of self-insurance only came out of the decline in pension plans, but isn’t necessary if you purchase a Personal Pension (a new kind of subscription-based income annuity) or traditional income annuity.
Income annuities shift the risk of living longer than expected to an insurance company. Insurers are able to pool this risk and use the markets to protect themselves in ways you can’t do on your own. When you purchase a traditional annuity, you pay a lump sum upfront, and then receive a regular paycheck for the rest of your life. With a Personal Pension, you contribute on a subscription basis and then get the same regular paycheck when you retire that you get from a traditional income annuity. You tell the insurance company at the onset when you want to start receiving your checks, allowing you to wait until you need it.
So what are the major reasons to buy an income annuity or Personal Pension, and how do you know if an income annuity is right for you?
We’ll start with the pros. When you purchase an income annuity, you receive a guaranteed stream of income that provides you with something invaluable: peace of mind. With an income annuity, you can spend your retirement savings with the promise of income on the horizon.
Paying for security later on gives you more freedom to enjoy your hard-earned savings now. But remember: annuities are a form of insurance, not an investment. They won’t yield the high financial returns of stocks, but they’ll provide financial and mental comfort.
When it comes to determining if purchasing an income annuity is the right move for you, here are some additional tips to keep in mind:
- Typically, you want to wait until you’re at least 45 years old to purchase
- Make sure you have enough money saved for emergencies, outside of the money you annuitize
- If your health is below average, and you’re less concerned about protecting against longevity risk, an annuity purchase may not make sense for you
- If you’re looking to pass significant money onto heirs, you must factor that into your annuity purchase decision
Unlike an income annuity, the Personal Pension allows you to contribute over time, in smaller increments. Generally, it makes the most sense for younger workers or those unsure about the future path of interest rates.
Enrolling in the Personal Pension or purchasing a traditional income annuity simply gives you a guarantee your assets cannot provide: a stream of income during your entire retirement. By having these products do the work for you, you don’t have to worry about running out of money anytime in the near future. We recommend using our Diagnostic Tool, which will will project your income needs in retirement based on some basic information, and suggest funding plans that are within your means.
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