Bulk Up Your Sustainable Lifetime Income

Bulk Up Your Sustainable Lifetime Income

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When you retire, how would you like to receive monthly income that provides the following eight advantages:?

  • Lifetime payment
  • Annual increase of 8% for each year that you wait to receive it up to 32% if you wait four years
  • Potential annual cost of living adjustment (COLA)
  • 15%, and possibly 50% or 100%, federal income tax exemption subject to the amount of your other income
  • 100% state income tax exemption unless you live in one of the 13 states that tax this type of income
  • 50% of your paycheck payable to your spouse for the rest of your life
  • 100% of your paycheck payable to your spouse for the rest of his/her life after you die if the amount is greater than his/her payment
  • Guaranteed by the U.S. government for the last 76 years

If you haven’t figured it out yet, the foregoing are all associated with Social Security retirement benefits. Each is attractive in and of itself. When taken as a whole, it’s an almost perfect solution for retirees.

Uncovered Expenses

What’s missing? Depending upon the amount of your monthly benefit, which is determined by several variables, your annual after-tax benefit will generally be somewhere between $10,000 and $25,000.  While this is a nice base, the reality is that this may only pay for groceries and a small to moderate amount of housing expenses.

What about all of your other expenses? How are you going to cover them? Assuming that you don’t receive a sizable lifetime pension or annuity payment, you’re probably dependent upon savings and other investments to pay for your other nondiscretionary and discretionary expenses.

Unless the item is tax-deductible such as property taxes, you need to withdraw 20% – 65% more than the amount of your expense if you’re paying for it with funds from non-Roth retirement plan accounts depending upon your tax bracket. In addition, all savings and investment accounts are subject to various risks, including longevity, withdrawal rate, inflation, and sequence of returns.

Supplement Your Social Security Income

Given these facts, why wouldn’t you want to exchange a portion of your savings and investments for another secure lifetime paycheck similar to what you receive or will be receiving from Social Security? This paycheck would be paid from a life insurance company in the form of a fixed income annuity. Life insurance companies are heavily regulated and are subject to strict financial reserve requirements. Many are highly rated and have been making annuity payments longer than the U.S. government has been paying Social Security benefits.

In addition to receiving a secure paycheck, a fixed income annuity shelters you from the longevity, withdrawal rate, and sequence of returns risks associated with investment accounts. While it doesn’t technically protect you from inflation risk unless you opt for an annual inflation adjustment, the mortality credits built into fixed income annuities increase the return that you receive compared to other types of fixed income investments.

Duplicate Social Security’s Advantages

With a fixed income annuity, you can match three of Social Security’s advantages and potentially improve upon a fourth. The three benefits you can match are sustainable lifetime payment, potential annual cost of living adjustment, and joint lifetime payment if you are survived by a spouse.

The benefit where you can potentially do better than Social Security is taxation. Whereas many Social Security recipients are only able to exclude 15% of their benefits from federal income tax due to the amount of their other income, individuals who receive payments from two types of nonretirement fixed income annuities can shelter approximately 50% of their benefits from federal and state income tax.

The two types of annuities are single premium immediate annuities (SPIAs) and deferred income annuities (DIAs). The amount of each payment that’s excluded from taxation is the portion that’s considered to be a return of one’s investment. The calculation is determined by your life expectancy at the annuity starting date.

Although Social Security provides a nice after-tax base of sustainable lifetime income, it’s limited in the amount of expenses it can cover. Supplemented by an appropriate amount of income from fixed income annuities, it can reduce a number of risks associated with equity and other types of investments and provide peace of mind.

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