Take the time you need to learn about retirement income strategies.
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How should you deploy your retirement savings to generate lifetime income? That’s one of several critical decisions pre-retirees face as they approach retirement.
To help you answer this question, let’s look at the “Retirement Income Scorecard” that I developed to estimate the amount of annual retirement income that $100,000 in savings can generate for a 65-year-old married couple. The scorecard looks at 10 different retirement income generators (RIGs) that are all viable methods for providing retirees with lifetime income. Each RIG uses one of four general types of RIGs:
- Implementing a Social Security bridge payment
- Purchasing a guaranteed lifetime annuity from an insurance company
- Using interest and dividend payments from investments, leaving principal intact
- Investing savings and making systematic withdrawals of principal and investment earnings
In a previous post, I described these four general types of RIGs in detail, including their pros and cons. You might like to review that post for more information.
As you’ll see in Figure 1 below, the amount of retirement income you can generate from your savings will vary considerably, depending on the specific RIG, or combination of RIGs, that you select. In Figure 1, the different types of RIGs are represented by different colors.
Steve Vernon
Notes: The amounts shown in Figure 1 are based on annuity purchase rates from ImmediateAnnuities.com, yields on investments from Morningstar, and payout rates that are common from VA/GLWB products. These analyses are as of June 2020.
What are the payout rates?
One common metric that can be used to assess and compare retirement income generators is the “payout rate,” which is simply the amount of annual retirement income you’ll receive in the first year of retirement divided by the amount of savings devoted to the RIG. Figure 2 below shows the payout rates for the RIGs analyzed in Figure 1.
Steve Vernon
The payout rate is just one consideration you can use when selecting a RIG or combination of RIGs. There are other goals that can influence your decision on the RIG(s) that might work best for your goals and circumstances, such as your preference for savings you can access throughout retirement and your goals for leaving a legacy.
All of the RIGs considered here are viable ways to generate retirement income. There are many other possible RIGs that will generate different amounts of retirement income, and each have their own advantages and disadvantages.
If you’re interested in detailed descriptions of the specific RIGs in Figures 1 and 2, including the acronyms, please see my post below. I didn’t include the details in this post to make it a reasonable length.
Building a portfolio of retirement income for a potentially long retirement is a critical task. Take whatever time is necessary for you to learn about your options and make an informed choice.