Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York.
Retirement planning and wealth management help us do the things we didn't have the time or resources to do while working full time. But where does the money for retirement come from?
When we're preparing to retire, we generally have seven financial planning "action levers" that we can use to help pay for retirement. These seven levers are:
- Delaying retirement, when possible
- Social Security benefits maximization
- Home equity or reverse mortgage decision
- Asset allocation of investment portfolios, including tax efficiency
- Withdrawal strategies from investments, including legacy planning
- Managing living expenses and debt
- Generating income from an annuity
1. Delaying retirement, when possible
Delaying retirement can be a powerful way to ensure you don't run out of money. But there are many reasons people can't delay or work during retirement, such as health issues or limited job options. Working during retirement may also defeat the purpose of retirement, which is to have more fun.
2. Social Security benefits maximization
Postponing when you start taking your Social Security payments is another way to generate more retirement income. Waiting until your full retirement age can help ensure you don't leave some potential benefits on the table.
3. Home equity or reverse mortgage decision
For retirees with equity in their homes, generating income through home equity loans or reverse mortgages is a possibility. However, many are reluctant to use this as a retirement income strategy.
4. Asset allocation of investment portfolios, including tax efficiency
If you have investment portfolios that can generate reasonable income during retirement, you'll most likely need to own the task of managing the appropriate asset allocation.
5. Withdrawal strategies from investments, including legacy planning
If you're only using an investment portfolio to satisfy your retirement income needs, you'll need a withdrawal strategy that will last, even during volatile markets. This can often be an emotional and complicated process.
6. Managing living expenses and debt
While it may not be ideal, scaling back your lifestyle or limiting expenses is another way to ensure you don't run out of money in retirement. Simplify your finances by using personal budgeting tools.
7. Generating income from an annuity
The seventh lever is annuitization, See note 1 or creating retirement income by using an annuity. Some may ask, “What are annuities and how do they fit into the retirement picture?” Annuities are a powerful financial management tool to help generate retirement income that you can't outlive. As fewer employers offer pensions for employees, the use of income annuities can help fill part of the gap. Let's look at how the following types of annuities, which are guaranteed See note 2 not to lose principal, might fit into your retirement picture:
Deferred fixed annuity
This can be used to create future income for life. A deferred fixed annuity can be annuitized later, allowing the owner to lock in lifetime income.
Single premium immediate annuity
This helps you build a protected retirement income that you can't outlive. It can be purchased at retirement or layered over time as the individual's needs change with age. A single premium immediate annuity can also help bridge an individual's income gap while they delay taking Social Security benefits to receive a higher monthly amount. Some may choose an immediate annuity for simplicity versus trying to implement more complicated retirement income strategies from other investments.
Deferred income annuity
This allows for the prepurchase of lifetime income for those who want to build retirement income before retirement or who want to buy an annuity that begins later in life. This can be a cost-effective way to protect against longevity risk.
Calculate your retirement income shortfall.
Many experts recommend using annuities to help cover part of your essential retirement expenses that aren't covered by existing guaranteed income, which are usually from Social Security or military or private pensions. We tend to spend what we bring in. Therefore, it's up to you to determine how much steady income you want to make in retirement. Since your retirement plan depends on your unique circumstances, seek help when needed.
Have more questions about your retirement?
Talk to a USAA retirement income specialist.