When you retire, how would you like to wake up each morning knowing that 50% or more of your income will automatically be deposited in your checking account each month for the rest of your life? How would that make you feel?
If you think like retirees who responded to a recent Towers Watson survey, you should feel pretty good. Individuals who received 50% or more of their income from a predictable income source such as a pension or an annuity said they were less likely to worry about their financial future than those who didn’t.
This confirmed the findings of a previous Towers Watson survey that found that those with annuitized incomes are happiest and worried less about their financial future.
Predictable income key to pre-retirees’ financial mood
The Towers Watson survey findings aren’t limited to retirees. My personal experience working with retirement income planning clients before retirement is similar. Specifically, individuals who know that they will receive pension and/or annuity income that will cover a sizable portion of their projected expenses throughout retirement are more confident about their ability to retire and remain retired than those who aren’t in this situation.
Furthermore, it isn’t only about the future. Pre-retiree clients with predictable sources of retirement income other than Social Security worry less about the day-to-day movements of the stock market and the possibility of a stock market crash when they retire than those who don’t have this luxury. Financial anxiety decreases with increasing amounts of dependable income relative to one’s projected needs.
Don’t wait until retirement to secure your income
What if you won’t be receiving a significant private or government pension? Should you follow the typical advice to wait until retirement to purchase an immediate annuity? Unless you’re within a few years of retiring, the answer is generally no.
There are four reasons why you shouldn’t wait until retirement to secure your retirement paycheck:
- You won’t know how much will be available to invest in an immediate annuity when you retire unless you (a) invest in fixed-interest vehicles that don’t fluctuate in value and (b) don’t take any withdrawals.
- You won’t know the amount of income you will receive until you finally purchase your annuity.
- The amount of your projected retirement expenses that will be covered by your annuity income will be unknown.
- You will continue to experience greater anxiety about your financial future.
Deferred fixed-income annuities to the rescue
If you won’t be receiving a pension and you don’t want to wait until retirement to purchase an immediate annuity, how do you generate a retirement paycheck that you won’t outlive?
One of the major purposes of deferred fixed-income annuities is to secure predictable lifetime or term-certain (with DIAs) income that will begin at or during retirement several years before the income is needed. The longer the deferral period, the greater the amount of income you will receive.
A unique advantage of using deferred fixed-income annuities is that the amount, timing, duration, and taxation of income are known and can be planned for at the time of purchase years before the first payment will be received. Professional advice is critical to structuring a plan that will use the least amount of funds to meet your projected income needs. The individual you work with should have expertise in working with deferred fixed-income annuity strategies.
Do you want to reduce your retirement anxiety? Insure a portion of your retirement income.
DISCLOSURE: Robert Klein is licensed as a Resident Insurance Producer in California (License #0708321).
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.