{"id":288,"date":"2019-01-18T21:50:11","date_gmt":"2019-01-18T21:50:11","guid":{"rendered":"http:\/\/retirementhangout.com\/?p=288"},"modified":"2019-01-19T19:05:13","modified_gmt":"2019-01-19T19:05:13","slug":"managing-money-in-retirement-ii-income-for-a-lifetime","status":"publish","type":"post","link":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/","title":{"rendered":"Managing Money in Retirement II:                 Income for a Lifetime"},"content":{"rendered":"\n<p><em>This is the second of a series of posts on retirement withdrawal strategies.&nbsp; If you haven\u2019t read <a href=\"https:\/\/retirementhangout.com\/index.php\/2019\/01\/15\/managing-money-in-retirement-how-much-can-i-withdraw\/\">Managing &nbsp;Money in Retirement I<\/a>, please read it first!&nbsp; <\/em><\/p>\n\n\n\n<p>Most of us would feel more comfortable having a reliable source of income in retirement &#8212; at least enough to cover our essential needs \u2013 rather than being completely at the mercy of uncertain investments in stocks, bonds, real estate or more exotic things.&nbsp; &nbsp;As a practical matter, though, how can we go about building the floor of a floor-and-upside strategy?&nbsp; &nbsp;<\/p>\n\n\n\n<p>First, let\u2019s define what we\u2019d\nlike in the ideal world.&nbsp; The best source\nof income would be an inflation-indexed payment, lasting for your lifetime (and\nthat of your spouse, if you\u2019re part of a couple), paid by some entity that you\u2019re\nconfident will be around and solvent for the next 30 or 40 years.&nbsp;&nbsp; <\/p>\n\n\n\n<p>Hmm\u2026 are there really any income\nsources that meet these criteria?&nbsp; Perhaps\nnot perfectly.&nbsp; But <strong>S<em>ocial Security<\/em> <\/strong>comes\nclose \u2013 it\u2019s guaranteed for a lifetime, is indexed for inflation, transfers to\na spouse upon death, and is backed by the full faith and credit of the US\ngovernment.&nbsp; Of course, long-term\nfinancing issues remain unresolved, which creates some uncertainty \u2013 primarily affecting\nyounger workers.&nbsp; <\/p>\n\n\n\n<p><strong><em>Pensions<\/em> <\/strong>are also\nexcellent sources of retirement income, meeting most of the same criteria.&nbsp; Unfortunately, defined-benefit pensions are\ndisappearing quickly, with government workers the primary class of workers\nstill covered.&nbsp; <\/p>\n\n\n\n<p>What if Social Security (and, if\nyou\u2019re lucky, a pension) aren\u2019t sufficient to cover your essential needs?&nbsp; Some financial planners suggest creating a <strong><em>ladder\nof bonds<\/em><\/strong>thatwill mature each year of retirement.&nbsp; Buying TIPS (Treasury Inflation-Protected\nSecurities) would protect your bond ladder against inflation (otherwise a\nsignificant risk to purchasing power over 30 years or so). &nbsp;&nbsp;I really like TIPS, which address several of\nthe major drawbacks of investing in bonds \u2013 inflation risk and default risk\n(since they\u2019re guaranteed by the US government).&nbsp; However, a 30-year TIPS ladder would be cumbersome\nto manage and potentially very expensive.&nbsp;\nAlso, it doesn\u2019t really provide longevity protection (certain income for\na lifetime), since in practice one needs to buy bonds for a certain number of\nyears (say, 30), after which your income ceases!&nbsp; <\/p>\n\n\n\n<p><strong>Annuities \u2013 the Answer, or Financial Snake Oil?<\/strong><\/p>\n\n\n\n<p>An annuity, specifically a Single Premium Immediate Annuity (SPIA), is another approach favored by many financial planners that, in theory, meets most of the criteria for \u2018certain\u2019 lifetime income.\u00a0 <em>Just hold on there, pardner<\/em>, you say.\u00a0 You\u2019ve heard the horror stories about annuities and, besides, there are ads all over the Internet warning against them.  They&#8217;re the spawn of Satan, aren&#8217;t they, just waiting to ensnare unwary old-timers?<\/p>\n\n\n\n<p>It is true that annuities have\nbeen subject to abuse in the past.&nbsp; One\nexample: a family member was sold an annuity with a 15-year surrender period\nwhen in his mid-80s. &nbsp;&nbsp;He couldn\u2019t have withdrawn his money without a\nstiff penalty until he was over a hundred!<\/p>\n\n\n\n<p>Still, annuities are not\ninherently evil.&nbsp; In theory, they could serve\nas the vehicle we\u2019re looking for to provide safe, secure, lifetime income.&nbsp; Basically, you pay an insurance company an\namount up front and they promise to provide you a certain payment for your\nlifetime.&nbsp; In essence, you\u2019re buying your\nown pension.&nbsp; <\/p>\n\n\n\n<p>Many financial planners see\nannuities as an essential tool for managing retirement income.&nbsp; By spreading the risk across many people,\ninsurance companies should be able to pay out more than you could safely\nwithdraw on your own.&nbsp; You can purchase\nan annuity that covers both halves of a couple and\/or is indexed to inflation (both\nof these reduce the payout).&nbsp; <\/p>\n\n\n\n<p style=\"font-size:24px\"><em>By spreading\nthe risk across many people, insurance companies should be able to pay out more\nthan you could safely withdraw on your own.<\/em><\/p>\n\n\n\n<p><strong>Annuity Downsides<\/strong><\/p>\n\n\n\n<p>One risk with annuities is that you\u2019re depending on the ability of the insurance company to be around to pay you when the time comes.&nbsp; The risk may be small, but it is not zero.&nbsp; (Remember the AIG bailout in 2008?)&nbsp; You can mitigate, but not eliminate, this risk by purchasing annuities from several different companies, and by making sure those companies are financially sound.&nbsp; (They\u2019re rated by outfits such as Standard and Poor\u2019s and AM Best.)&nbsp; &nbsp;They are typically regulated by state insurance commissioners, so there is some oversight to ensure (in theory, at least) that they are managed responsibly.<\/p>\n\n\n\n<p>A big downside to annuities is that you lose liquidity.\u00a0 Indeed, with an immediate annuity the money is no longer yours at all \u2013 you\u2019re paying it to the insurance company in return for the promise to pay you back over time.\u00a0 This might be a problem if down the road you have a large, unexpected expense, such as a medical bill or disaster not covered by insurance (e.g., fire, flood, or lawsuit).\u00a0 For this reason, financial advisers caution retirees never to lock up more than 50% of their savings in an annuity.\u00a0 <\/p>\n\n\n\n<p>What does an annuity cost? &nbsp;Prepare for sticker shock!&nbsp; As of the date of this post, I looked up (on <a href=\"https:\/\/www.immediateannuities.com\/b\/index-10.html?gclid=Cj0KCQiAj4biBRC-ARIsAA4WaFiemfjedgn02rS_HElsnqN05mYTFS-qyT7pkiq3Iw7q66ZJm5EdtNUaAipTEALw_wcB\">immediateannuities.com<\/a>) the cost of an immediate lifetime annuity, indexed to inflation, for a 65-year-old couple.&nbsp; For a $100,000 investment, I received an offer of $320 a month, or $3,840 per year \u2013 a payout rate of 3.84%.&nbsp; Ouch!&nbsp; &nbsp;Since I\u2019m confident I could withdraw 4% a year with little risk of running out and without losing control of my money, I find this offer easy to pass up.&nbsp; (Thanks, Bill Bengen.)<\/p>\n\n\n\n<p style=\"font-size:24px\"><em>What does an\nannuity cost? &nbsp;Prepare for sticker shock!<\/em><\/p>\n\n\n\n<p><strong>Look Before You Leap<\/strong><\/p>\n\n\n\n<p>I suspect most retirees who look\ninto annuities come to the same conclusion I do.&nbsp; But some \u2013 especially those who lack a\npension and receive little or no social security \u2013 may value the promise of a\nsteady, lifetime income enough to be interested.&nbsp; My advice: even if you\u2019re a do-it-yourselfer on\nmost financial matters, putting a substantial chunk of your retirement savings\ninto an annuity is a big, irreversible decision.&nbsp; Consult a financial adviser (one who doesn\u2019t\nstand to make any money from your decision!) or a trusted, financially savvy\nfriend before making this leap.<\/p>\n\n\n\n<p>At this point, you may be feeling\ndiscouraged.&nbsp; &nbsp;Don\u2019t be!&nbsp;\nIn the next post, I outline a way that most people can increase their\nlifetime income at a very reasonable cost.<\/p>\n\n\n\n<p><strong>References<\/strong><\/p>\n\n\n\n<p>Piper, Mike.&nbsp; (2018).&nbsp;\n<em>Can I Retire?<\/em>&nbsp; Simple Subjects, LLC.<\/p>\n\n\n\n<p>Quinn, Jane Bryant.&nbsp; (2016). <em>How\nto Make Your Money Last<\/em>.&nbsp; New York:\nSimon and Schuster.<\/p>\n\n\n\n<p>Vernon,\nSteve.&nbsp; (2012). <em>Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement\nPaycheck.&nbsp; <\/em>Oxnard, CA: Rest-of-Life\nCommunications.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>This is the second of a series of posts on retirement withdrawal strategies.&nbsp; If you haven\u2019t read Managing &nbsp;Money in Retirement I, please read it first!&nbsp; Most of us would feel more comfortable having a reliable source of income in retirement &#8212; at least enough to cover our essential needs \u2013 rather than being completely at the mercy of uncertain investments in stocks, bonds, real estate or more exotic things.&nbsp; &nbsp;As a practical matter, though, how can we go about building the floor of a floor-and-upside strategy?&nbsp; &nbsp; First, let\u2019s define what we\u2019d like in the ideal world.&nbsp; The best source of income would be an inflation-indexed payment, lasting for your lifetime (and that of your spouse, if you\u2019re part of a couple), paid by some entity that you\u2019re confident will be around and solvent for the next 30 or 40 years.&nbsp;&nbsp; Hmm\u2026 are there really any income sources that meet these criteria?&nbsp; Perhaps not perfectly.&nbsp; But Social Security comes close \u2013 it\u2019s guaranteed for a lifetime, is indexed for inflation, transfers to a spouse upon death, and is backed by the full faith and credit of the US government.&nbsp; Of course, long-term financing issues remain unresolved, which creates some uncertainty \u2013 primarily affecting younger workers.&nbsp; Pensions are also excellent sources of retirement income, meeting most of the same criteria.&nbsp; Unfortunately, defined-benefit pensions are disappearing quickly, with government workers the primary class of workers still covered.&nbsp; What if Social Security (and, if you\u2019re lucky, a pension) aren\u2019t sufficient to cover your essential needs?&nbsp; Some financial planners suggest creating a ladder of bondsthatwill mature each year of retirement.&nbsp; Buying TIPS (Treasury Inflation-Protected Securities) would protect your bond ladder against inflation (otherwise a significant risk to purchasing power over 30 years or so). &nbsp;&nbsp;I really like TIPS, which address several of the major drawbacks of investing in bonds \u2013 inflation risk and default risk (since they\u2019re guaranteed by the US government).&nbsp; However, a 30-year TIPS ladder would be cumbersome to manage and potentially very expensive.&nbsp; Also, it doesn\u2019t really provide longevity protection (certain income for a lifetime), since in practice one needs to buy bonds for a certain number of years (say, 30), after which your income ceases!&nbsp; Annuities \u2013 the Answer, or Financial Snake Oil? An annuity, specifically a Single Premium Immediate Annuity (SPIA), is another approach favored by many financial planners that, in theory, meets most of the criteria for \u2018certain\u2019 lifetime income.\u00a0 Just hold on there, pardner, you say.\u00a0 You\u2019ve heard the horror stories about annuities and, besides, there are ads all over the Internet warning against them. They&#8217;re the spawn of Satan, aren&#8217;t they, just waiting to ensnare unwary old-timers? It is true that annuities have been subject to abuse in the past.&nbsp; One example: a family member was sold an annuity with a 15-year surrender period when in his mid-80s. &nbsp;&nbsp;He couldn\u2019t have withdrawn his money without a stiff penalty until he was over a hundred! Still, annuities are not inherently evil.&nbsp; In theory, they could serve as the vehicle we\u2019re looking for to provide safe, secure, lifetime income.&nbsp; Basically, you pay an insurance company an amount up front and they promise to provide you a certain payment for your lifetime.&nbsp; In essence, you\u2019re buying your own pension.&nbsp; Many financial planners see annuities as an essential tool for managing retirement income.&nbsp; By spreading the risk across many people, insurance companies should be able to pay out more than you could safely withdraw on your own.&nbsp; You can purchase an annuity that covers both halves of a couple and\/or is indexed to inflation (both of these reduce the payout).&nbsp; By spreading the risk across many people, insurance companies should be able to pay out more than you could safely withdraw on your own. Annuity Downsides One risk with annuities is that you\u2019re depending on the ability of the insurance company to be around to pay you when the time comes.&nbsp; The risk may be small, but it is not zero.&nbsp; (Remember the AIG bailout in 2008?)&nbsp; You can mitigate, but not eliminate, this risk by purchasing annuities from several different companies, and by making sure those companies are financially sound.&nbsp; (They\u2019re rated by outfits such as Standard and Poor\u2019s and AM Best.)&nbsp; &nbsp;They are typically regulated by state insurance commissioners, so there is some oversight to ensure (in theory, at least) that they are managed responsibly. A big downside to annuities is that you lose liquidity.\u00a0 Indeed, with an immediate annuity the money is no longer yours at all \u2013 you\u2019re paying it to the insurance company in return for the promise to pay you back over time.\u00a0 This might be a problem if down the road you have a large, unexpected expense, such as a medical bill or disaster not covered by insurance (e.g., fire, flood, or lawsuit).\u00a0 For this reason, financial advisers caution retirees never to lock up more than 50% of their savings in an annuity.\u00a0 What does an annuity cost? &nbsp;Prepare for sticker shock!&nbsp; As of the date of this post, I looked up (on immediateannuities.com) the cost of an immediate lifetime annuity, indexed to inflation, for a 65-year-old couple.&nbsp; For a $100,000 investment, I received an offer of $320 a month, or $3,840 per year \u2013 a payout rate of 3.84%.&nbsp; Ouch!&nbsp; &nbsp;Since I\u2019m confident I could withdraw 4% a year with little risk of running out and without losing control of my money, I find this offer easy to pass up.&nbsp; (Thanks, Bill Bengen.) What does an annuity cost? &nbsp;Prepare for sticker shock! Look Before You Leap I suspect most retirees who look into annuities come to the same conclusion I do.&nbsp; But some \u2013 especially those who lack a pension and receive little or no social security \u2013 may value the promise of a steady, lifetime income enough to be interested.&nbsp; My advice: even if you\u2019re a do-it-yourselfer on most financial matters, putting a substantial chunk of your retirement savings into an annuity is a big, irreversible decision.&nbsp; Consult a financial adviser (one who doesn\u2019t stand to make any money from your decision!) or a trusted, financially savvy friend before making this leap. At this point, you may be feeling discouraged.&nbsp; &nbsp;Don\u2019t be!&nbsp; In the next post, I outline a way that most people can increase their lifetime income at a very reasonable cost. References Piper, Mike.&nbsp; (2018).&nbsp; Can I Retire?&nbsp; Simple Subjects, LLC. Quinn, Jane Bryant.&nbsp; (2016). How to Make Your Money Last.&nbsp; New York: Simon and Schuster. Vernon, Steve.&nbsp; (2012). Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.&nbsp; Oxnard, CA: Rest-of-Life Communications.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[27,26,18,23,5,25,28,24],"class_list":["post-288","post","type-post","status-publish","format-standard","hentry","category-retirement-planning","tag-annuities","tag-bond-ladder","tag-floor-and-upside","tag-retirement-finance","tag-retirement-planning","tag-social-security","tag-spias","tag-withdrawals-in-retirement"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Managing Money in Retirement II:         Income for a Lifetime - Retirement Hangout<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Managing Money in Retirement II:         Income for a Lifetime - Retirement Hangout\" \/>\n<meta property=\"og:description\" content=\"This is the second of a series of posts on retirement withdrawal strategies.&nbsp; If you haven\u2019t read Managing &nbsp;Money in Retirement I, please read it first!&nbsp; Most of us would feel more comfortable having a reliable source of income in retirement &#8212; at least enough to cover our essential needs \u2013 rather than being completely at the mercy of uncertain investments in stocks, bonds, real estate or more exotic things.&nbsp; &nbsp;As a practical matter, though, how can we go about building the floor of a floor-and-upside strategy?&nbsp; &nbsp; First, let\u2019s define what we\u2019d like in the ideal world.&nbsp; The best source of income would be an inflation-indexed payment, lasting for your lifetime (and that of your spouse, if you\u2019re part of a couple), paid by some entity that you\u2019re confident will be around and solvent for the next 30 or 40 years.&nbsp;&nbsp; Hmm\u2026 are there really any income sources that meet these criteria?&nbsp; Perhaps not perfectly.&nbsp; But Social Security comes close \u2013 it\u2019s guaranteed for a lifetime, is indexed for inflation, transfers to a spouse upon death, and is backed by the full faith and credit of the US government.&nbsp; Of course, long-term financing issues remain unresolved, which creates some uncertainty \u2013 primarily affecting younger workers.&nbsp; Pensions are also excellent sources of retirement income, meeting most of the same criteria.&nbsp; Unfortunately, defined-benefit pensions are disappearing quickly, with government workers the primary class of workers still covered.&nbsp; What if Social Security (and, if you\u2019re lucky, a pension) aren\u2019t sufficient to cover your essential needs?&nbsp; Some financial planners suggest creating a ladder of bondsthatwill mature each year of retirement.&nbsp; Buying TIPS (Treasury Inflation-Protected Securities) would protect your bond ladder against inflation (otherwise a significant risk to purchasing power over 30 years or so). &nbsp;&nbsp;I really like TIPS, which address several of the major drawbacks of investing in bonds \u2013 inflation risk and default risk (since they\u2019re guaranteed by the US government).&nbsp; However, a 30-year TIPS ladder would be cumbersome to manage and potentially very expensive.&nbsp; Also, it doesn\u2019t really provide longevity protection (certain income for a lifetime), since in practice one needs to buy bonds for a certain number of years (say, 30), after which your income ceases!&nbsp; Annuities \u2013 the Answer, or Financial Snake Oil? An annuity, specifically a Single Premium Immediate Annuity (SPIA), is another approach favored by many financial planners that, in theory, meets most of the criteria for \u2018certain\u2019 lifetime income.\u00a0 Just hold on there, pardner, you say.\u00a0 You\u2019ve heard the horror stories about annuities and, besides, there are ads all over the Internet warning against them. They&#8217;re the spawn of Satan, aren&#8217;t they, just waiting to ensnare unwary old-timers? It is true that annuities have been subject to abuse in the past.&nbsp; One example: a family member was sold an annuity with a 15-year surrender period when in his mid-80s. &nbsp;&nbsp;He couldn\u2019t have withdrawn his money without a stiff penalty until he was over a hundred! Still, annuities are not inherently evil.&nbsp; In theory, they could serve as the vehicle we\u2019re looking for to provide safe, secure, lifetime income.&nbsp; Basically, you pay an insurance company an amount up front and they promise to provide you a certain payment for your lifetime.&nbsp; In essence, you\u2019re buying your own pension.&nbsp; Many financial planners see annuities as an essential tool for managing retirement income.&nbsp; By spreading the risk across many people, insurance companies should be able to pay out more than you could safely withdraw on your own.&nbsp; You can purchase an annuity that covers both halves of a couple and\/or is indexed to inflation (both of these reduce the payout).&nbsp; By spreading the risk across many people, insurance companies should be able to pay out more than you could safely withdraw on your own. Annuity Downsides One risk with annuities is that you\u2019re depending on the ability of the insurance company to be around to pay you when the time comes.&nbsp; The risk may be small, but it is not zero.&nbsp; (Remember the AIG bailout in 2008?)&nbsp; You can mitigate, but not eliminate, this risk by purchasing annuities from several different companies, and by making sure those companies are financially sound.&nbsp; (They\u2019re rated by outfits such as Standard and Poor\u2019s and AM Best.)&nbsp; &nbsp;They are typically regulated by state insurance commissioners, so there is some oversight to ensure (in theory, at least) that they are managed responsibly. A big downside to annuities is that you lose liquidity.\u00a0 Indeed, with an immediate annuity the money is no longer yours at all \u2013 you\u2019re paying it to the insurance company in return for the promise to pay you back over time.\u00a0 This might be a problem if down the road you have a large, unexpected expense, such as a medical bill or disaster not covered by insurance (e.g., fire, flood, or lawsuit).\u00a0 For this reason, financial advisers caution retirees never to lock up more than 50% of their savings in an annuity.\u00a0 What does an annuity cost? &nbsp;Prepare for sticker shock!&nbsp; As of the date of this post, I looked up (on immediateannuities.com) the cost of an immediate lifetime annuity, indexed to inflation, for a 65-year-old couple.&nbsp; For a $100,000 investment, I received an offer of $320 a month, or $3,840 per year \u2013 a payout rate of 3.84%.&nbsp; Ouch!&nbsp; &nbsp;Since I\u2019m confident I could withdraw 4% a year with little risk of running out and without losing control of my money, I find this offer easy to pass up.&nbsp; (Thanks, Bill Bengen.) What does an annuity cost? &nbsp;Prepare for sticker shock! Look Before You Leap I suspect most retirees who look into annuities come to the same conclusion I do.&nbsp; But some \u2013 especially those who lack a pension and receive little or no social security \u2013 may value the promise of a steady, lifetime income enough to be interested.&nbsp; My advice: even if you\u2019re a do-it-yourselfer on most financial matters, putting a substantial chunk of your retirement savings into an annuity is a big, irreversible decision.&nbsp; Consult a financial adviser (one who doesn\u2019t stand to make any money from your decision!) or a trusted, financially savvy friend before making this leap. At this point, you may be feeling discouraged.&nbsp; &nbsp;Don\u2019t be!&nbsp; In the next post, I outline a way that most people can increase their lifetime income at a very reasonable cost. References Piper, Mike.&nbsp; (2018).&nbsp; Can I Retire?&nbsp; Simple Subjects, LLC. Quinn, Jane Bryant.&nbsp; (2016). How to Make Your Money Last.&nbsp; New York: Simon and Schuster. Vernon, Steve.&nbsp; (2012). Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.&nbsp; Oxnard, CA: Rest-of-Life Communications.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/\" \/>\n<meta property=\"og:site_name\" content=\"Retirement Hangout\" \/>\n<meta property=\"article:published_time\" content=\"2019-01-18T21:50:11+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2019-01-19T19:05:13+00:00\" \/>\n<meta name=\"author\" content=\"Hangout Host\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Hangout Host\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/retirementhangout.com\\\/index.php\\\/2019\\\/01\\\/18\\\/managing-money-in-retirement-ii-income-for-a-lifetime\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/retirementhangout.com\\\/index.php\\\/2019\\\/01\\\/18\\\/managing-money-in-retirement-ii-income-for-a-lifetime\\\/\"},\"author\":{\"name\":\"Hangout Host\",\"@id\":\"https:\\\/\\\/retirementhangout.com\\\/#\\\/schema\\\/person\\\/8c4ae01981f8f32c14283392437fea2a\"},\"headline\":\"Managing Money in Retirement II: Income for a Lifetime\",\"datePublished\":\"2019-01-18T21:50:11+00:00\",\"dateModified\":\"2019-01-19T19:05:13+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/retirementhangout.com\\\/index.php\\\/2019\\\/01\\\/18\\\/managing-money-in-retirement-ii-income-for-a-lifetime\\\/\"},\"wordCount\":1170,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\\\/\\\/retirementhangout.com\\\/#\\\/schema\\\/person\\\/8c4ae01981f8f32c14283392437fea2a\"},\"keywords\":[\"annuities\",\"bond ladder\",\"floor and upside\",\"retirement finance\",\"Retirement planning\",\"social security\",\"SPIAs\",\"withdrawals in retirement\"],\"articleSection\":[\"Retirement planning\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/retirementhangout.com\\\/index.php\\\/2019\\\/01\\\/18\\\/managing-money-in-retirement-ii-income-for-a-lifetime\\\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/retirementhangout.com\\\/index.php\\\/2019\\\/01\\\/18\\\/managing-money-in-retirement-ii-income-for-a-lifetime\\\/\",\"url\":\"https:\\\/\\\/retirementhangout.com\\\/index.php\\\/2019\\\/01\\\/18\\\/managing-money-in-retirement-ii-income-for-a-lifetime\\\/\",\"name\":\"Managing Money in Retirement II: Income for a Lifetime - 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Retirement Hangout","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/","og_locale":"en_US","og_type":"article","og_title":"Managing Money in Retirement II:         Income for a Lifetime - Retirement Hangout","og_description":"This is the second of a series of posts on retirement withdrawal strategies.&nbsp; If you haven\u2019t read Managing &nbsp;Money in Retirement I, please read it first!&nbsp; Most of us would feel more comfortable having a reliable source of income in retirement &#8212; at least enough to cover our essential needs \u2013 rather than being completely at the mercy of uncertain investments in stocks, bonds, real estate or more exotic things.&nbsp; &nbsp;As a practical matter, though, how can we go about building the floor of a floor-and-upside strategy?&nbsp; &nbsp; First, let\u2019s define what we\u2019d like in the ideal world.&nbsp; The best source of income would be an inflation-indexed payment, lasting for your lifetime (and that of your spouse, if you\u2019re part of a couple), paid by some entity that you\u2019re confident will be around and solvent for the next 30 or 40 years.&nbsp;&nbsp; Hmm\u2026 are there really any income sources that meet these criteria?&nbsp; Perhaps not perfectly.&nbsp; But Social Security comes close \u2013 it\u2019s guaranteed for a lifetime, is indexed for inflation, transfers to a spouse upon death, and is backed by the full faith and credit of the US government.&nbsp; Of course, long-term financing issues remain unresolved, which creates some uncertainty \u2013 primarily affecting younger workers.&nbsp; Pensions are also excellent sources of retirement income, meeting most of the same criteria.&nbsp; Unfortunately, defined-benefit pensions are disappearing quickly, with government workers the primary class of workers still covered.&nbsp; What if Social Security (and, if you\u2019re lucky, a pension) aren\u2019t sufficient to cover your essential needs?&nbsp; Some financial planners suggest creating a ladder of bondsthatwill mature each year of retirement.&nbsp; Buying TIPS (Treasury Inflation-Protected Securities) would protect your bond ladder against inflation (otherwise a significant risk to purchasing power over 30 years or so). &nbsp;&nbsp;I really like TIPS, which address several of the major drawbacks of investing in bonds \u2013 inflation risk and default risk (since they\u2019re guaranteed by the US government).&nbsp; However, a 30-year TIPS ladder would be cumbersome to manage and potentially very expensive.&nbsp; Also, it doesn\u2019t really provide longevity protection (certain income for a lifetime), since in practice one needs to buy bonds for a certain number of years (say, 30), after which your income ceases!&nbsp; Annuities \u2013 the Answer, or Financial Snake Oil? An annuity, specifically a Single Premium Immediate Annuity (SPIA), is another approach favored by many financial planners that, in theory, meets most of the criteria for \u2018certain\u2019 lifetime income.\u00a0 Just hold on there, pardner, you say.\u00a0 You\u2019ve heard the horror stories about annuities and, besides, there are ads all over the Internet warning against them. They&#8217;re the spawn of Satan, aren&#8217;t they, just waiting to ensnare unwary old-timers? It is true that annuities have been subject to abuse in the past.&nbsp; One example: a family member was sold an annuity with a 15-year surrender period when in his mid-80s. &nbsp;&nbsp;He couldn\u2019t have withdrawn his money without a stiff penalty until he was over a hundred! Still, annuities are not inherently evil.&nbsp; In theory, they could serve as the vehicle we\u2019re looking for to provide safe, secure, lifetime income.&nbsp; Basically, you pay an insurance company an amount up front and they promise to provide you a certain payment for your lifetime.&nbsp; In essence, you\u2019re buying your own pension.&nbsp; Many financial planners see annuities as an essential tool for managing retirement income.&nbsp; By spreading the risk across many people, insurance companies should be able to pay out more than you could safely withdraw on your own.&nbsp; You can purchase an annuity that covers both halves of a couple and\/or is indexed to inflation (both of these reduce the payout).&nbsp; By spreading the risk across many people, insurance companies should be able to pay out more than you could safely withdraw on your own. Annuity Downsides One risk with annuities is that you\u2019re depending on the ability of the insurance company to be around to pay you when the time comes.&nbsp; The risk may be small, but it is not zero.&nbsp; (Remember the AIG bailout in 2008?)&nbsp; You can mitigate, but not eliminate, this risk by purchasing annuities from several different companies, and by making sure those companies are financially sound.&nbsp; (They\u2019re rated by outfits such as Standard and Poor\u2019s and AM Best.)&nbsp; &nbsp;They are typically regulated by state insurance commissioners, so there is some oversight to ensure (in theory, at least) that they are managed responsibly. A big downside to annuities is that you lose liquidity.\u00a0 Indeed, with an immediate annuity the money is no longer yours at all \u2013 you\u2019re paying it to the insurance company in return for the promise to pay you back over time.\u00a0 This might be a problem if down the road you have a large, unexpected expense, such as a medical bill or disaster not covered by insurance (e.g., fire, flood, or lawsuit).\u00a0 For this reason, financial advisers caution retirees never to lock up more than 50% of their savings in an annuity.\u00a0 What does an annuity cost? &nbsp;Prepare for sticker shock!&nbsp; As of the date of this post, I looked up (on immediateannuities.com) the cost of an immediate lifetime annuity, indexed to inflation, for a 65-year-old couple.&nbsp; For a $100,000 investment, I received an offer of $320 a month, or $3,840 per year \u2013 a payout rate of 3.84%.&nbsp; Ouch!&nbsp; &nbsp;Since I\u2019m confident I could withdraw 4% a year with little risk of running out and without losing control of my money, I find this offer easy to pass up.&nbsp; (Thanks, Bill Bengen.) What does an annuity cost? &nbsp;Prepare for sticker shock! Look Before You Leap I suspect most retirees who look into annuities come to the same conclusion I do.&nbsp; But some \u2013 especially those who lack a pension and receive little or no social security \u2013 may value the promise of a steady, lifetime income enough to be interested.&nbsp; My advice: even if you\u2019re a do-it-yourselfer on most financial matters, putting a substantial chunk of your retirement savings into an annuity is a big, irreversible decision.&nbsp; Consult a financial adviser (one who doesn\u2019t stand to make any money from your decision!) or a trusted, financially savvy friend before making this leap. At this point, you may be feeling discouraged.&nbsp; &nbsp;Don\u2019t be!&nbsp; In the next post, I outline a way that most people can increase their lifetime income at a very reasonable cost. References Piper, Mike.&nbsp; (2018).&nbsp; Can I Retire?&nbsp; Simple Subjects, LLC. Quinn, Jane Bryant.&nbsp; (2016). How to Make Your Money Last.&nbsp; New York: Simon and Schuster. Vernon, Steve.&nbsp; (2012). Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.&nbsp; Oxnard, CA: Rest-of-Life Communications.","og_url":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/","og_site_name":"Retirement Hangout","article_published_time":"2019-01-18T21:50:11+00:00","article_modified_time":"2019-01-19T19:05:13+00:00","author":"Hangout Host","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Hangout Host","Est. reading time":"6 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/#article","isPartOf":{"@id":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/"},"author":{"name":"Hangout Host","@id":"https:\/\/retirementhangout.com\/#\/schema\/person\/8c4ae01981f8f32c14283392437fea2a"},"headline":"Managing Money in Retirement II: Income for a Lifetime","datePublished":"2019-01-18T21:50:11+00:00","dateModified":"2019-01-19T19:05:13+00:00","mainEntityOfPage":{"@id":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/"},"wordCount":1170,"commentCount":0,"publisher":{"@id":"https:\/\/retirementhangout.com\/#\/schema\/person\/8c4ae01981f8f32c14283392437fea2a"},"keywords":["annuities","bond ladder","floor and upside","retirement finance","Retirement planning","social security","SPIAs","withdrawals in retirement"],"articleSection":["Retirement planning"],"inLanguage":"en-US","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/#respond"]}]},{"@type":"WebPage","@id":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/","url":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/18\/managing-money-in-retirement-ii-income-for-a-lifetime\/","name":"Managing Money in Retirement II: Income for a Lifetime - 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