What is My Number?
Ensuring a Steady Stream of Income in Retirement: Planning for a Secure Future
Retirement marks a significant milestone—a time to enjoy the fruits of years of hard work. However, it also comes with the critical challenge of ensuring that your income lasts throughout your retirement years. Whether you’ve saved through your employer’s retirement plan, such as a 401(k) or pension, built a nest egg through IRAs, or inherited assets, the goal remains the same: creating a sustainable financial plan that provides a steady stream of income for the rest of your life.
Gathering Assets: Building the Foundation
For most people, the process of accumulating assets begins during their working years. This is often done through employer-sponsored retirement savings plans like 401(k)s, IRAs, and pensions. Many also supplement these savings with personal investments in stocks, bonds, or real estate. In some cases, individuals receive inheritances, which can provide a significant boost to their retirement funds.
While building this pool of assets is crucial, it’s only the first step. The ultimate goal of retirement planning is to transform these accumulated assets into a steady income stream that meets your needs for as long as you live. To do this effectively, retirees need to ask themselves a fundamental question: “What is my number?”
Determining “Your Number”: How Much Income Do You Need?
The question, “What is my number?” refers to the amount of income you will need throughout retirement to cover your expenses and maintain your desired lifestyle. This figure is not just about today’s needs but also about forecasting future requirements, taking inflation and potential healthcare costs into account. Determining this number involves evaluating:
– Current and future expenses: Including everything from basic living expenses (housing, food, utilities) to healthcare costs, travel plans, and other lifestyle choices.
– Expected sources of income: Such as Social Security, pensions, and any other available resources.
– Accumulated assets: Assessing the total value of your savings, investments, and other assets.
By calculating this number, retirees gain a clearer picture of how much they need to save, invest, and withdraw to ensure they don’t outlive their money.
Structuring Your Income: Right Now, Mid-Term, and Long-Term Money
A successful retirement plan involves structuring your assets strategically to provide income at different stages of retirement. It’s about balancing immediate needs with future security. Let’s break down the three main categories:
Right Now, Money:
This is the money you need to cover immediate expenses in the early years of retirement. It includes funds for housing, groceries, utilities, healthcare, and other essential needs. Because these funds need to be accessible, they are typically kept in liquid, low-risk accounts like savings accounts, money market accounts, or short-term bonds. The goal is to ensure these funds are stable and easily accessible without the risk of market fluctuations.
Money for 5 to 10 Years from Now:
The next tier of funds is set aside for mid-term needs. These funds are for expenses you might face in the next five to ten years, such as home maintenance, travel, or unexpected medical bills. Investments in this category should balance growth and stability, often involving low- to moderate-risk assets. Examples include intermediate-term bonds or dividend-paying stocks that provide growth potential while maintaining a level of stability.
Money for 15 to 25 Years from Now:
This final category focuses on long-term needs and ensures that you continue to receive income well into the later stages of retirement. Investments here are designed for growth, as these funds have the potential to benefit from compounding over time. These investments might include a diversified mix of stocks, mutual funds, or long-term bonds that align with your risk tolerance and financial goals. The objective is to maximize growth while managing risk, ensuring these assets can generate income in the future.
Annuities: A Steady Income Stream Across Retirement Phases
Annuities can be a powerful tool in retirement planning, particularly when it comes to determining “your number” and ensuring a steady stream of income throughout the various stages of retirement. They offer a way to transform your accumulated assets into a predictable income stream, which can be structured to cover different phases of retirement. Here’s how they work within each stage:
Right Now, Money:
For the immediate stage of retirement, annuities such as immediate annuities or fixed annuities can be used to generate a steady, guaranteed income stream that begins right away. These products convert a portion of your retirement savings into predictable monthly payments that cover essential expenses. This approach helps ensure you have consistent income for daily needs, regardless of market fluctuations.
Money for 5 to 10 Years from Now:
For the mid-term stage, deferred annuities can be a valuable tool. These annuities begin payouts at a future date, which might be five or ten years from the start of your retirement. By investing in a deferred annuity now, you secure income for this mid-term period, giving you peace of mind that these funds will be available when needed. Additionally, some deferred annuities offer growth potential, allowing your investment to grow until you start receiving payments.
Money for 15 to 25 Years from Now:
In the long-term stage, annuities can help protect against longevity risk—the risk of outliving your assets. Longevity annuities (also known as qualified longevity annuity contracts or QLACs when purchased with retirement funds) begin payouts later, typically at age 80 or 85. This approach ensures that even if other sources of income diminish, you will still have a guaranteed stream of income for the later years of your life.
Determining “Your Number” with Annuities
Annuities help retirees quantify and secure part of “your number” by guaranteeing income at different stages. Here’s how they assist in the process:
– Predictability: Annuities provide a predictable, fixed income, making it easier to calculate the amount you need from other sources (e.g., investments, Social Security) to reach “your number.
– Longevity Protection: Since annuities can be designed to last for life, they offer a safeguard against the risk of running out of money, ensuring your income aligns with your lifespan.
– Customizable Solutions: Annuities can be structured to fit your specific needs, whether you want income immediately, in the mid-term, or for the later stages of life.
Investing for a Lifetime: Creating a Stream of Income You Won’t Outlive
The key to a successful retirement strategy is investing in a way that aligns with your time horizon, risk tolerance, and income needs. By structuring assets into these three categories—immediate, mid-term, and long-term—you can create a diversified plan that helps balance income stability and growth potential.
Planning Ahead: Don’t Go It Alone
Retirement planning is complex, and finding the right balance between income, growth, and stability is crucial. This is why working with a financial advisor can be invaluable. Advisors help determine “your number,” assess your risk tolerance, and create a customized plan that aligns with your financial goals. They also provide ongoing support, adjusting strategies as needed to adapt to changes in the market or personal circumstances.
Conclusion
The journey to a financially secure retirement begins with understanding “What is my number?” and creating a diversified plan to ensure a steady stream of income. By strategically allocating assets to cover immediate, mid-term, and long-term needs, and by integrating annuities into your strategy, retirees can confidently enjoy their golden years, knowing they have a well-structured plan in place. Whether you’re just beginning your retirement planning or are already retired, now is the time to ensure your assets work for you, providing the income you need for a lifetime.
If you’re looking for guidance in building a sustainable retirement income plan, we’re here to help. Reach out today to start planning for your secure future.
