According to the National Center for Health Statistics (NCHS), the life expectancy was 68.2 years in 1950. In 1970, it was 70.8; by 2010 (latest date for which data is available) it had risen again, to 78.7 years. Living longer is a good thing, but most people would agree that quality of life is equally important. One way to help guarantee that you will enjoy a good quality of life during retirement is to ensure that you are able to meet any necessary financial obligations. Let's look at some of the ways you can help ensure you do not outlive your assets.
1. Determine Your Financial Readiness
Before deciding when you will retire, work with a financial planner to determine your financial readiness for retirement. While there are many free calculators available on the internet that promise to provide an assessment of your retirement readiness, these generally do not include all the pertinent factors that must be considered and should be regarded as a very rough indicator. Consider working with a financial planner who is experienced with retirement planning and can provide you with a comprehensive assessment. He or she will be more likely to ensure that all definite and possible factors are considered. A financial planner will also be able to provide you with a realistic road map to your retirement. This road map should include amounts you have already saved, the plans you have put in place and the steps you need to take to help you achieve a secure retirement. (For further reading, check out Dispelling The Myths Surrounding Financial Planners and Life Planning - More Than Just Money.)
2. Consider Adding Annuities to Your Portfolio
Enjoying an above-average return on your investments is an attractive goal. However, as you get closer to retirement, your risk tolerance will likely decrease, thereby increasing the need for safer investments. Most financial planners recommend diversifying your portfolio so that you can enjoy the various levels of returns, from guaranteed to high risk/reward. One way of enjoying the best of both worlds is to invest your assets in annuities. Be careful though, as all annuities are not created equal. When choosing an annuity, determine your objective, and then choose the one that's most suitable for you. The following are some general features of annuities:
|General Features||Fixed Annuity||Variable Annuity|
|Guaranteed principal, where you cannot lose the amount you invest regardless of the performance of the underlying investments||√||-|
|Principal and return are not guaranteed||-||√|
|Guaranteed earnings at a fixed rate of interest or fixed amount for a fixed period. Some programs pay interest in addition to the minimum guaranteed amounts.||√||-|
|Invested in funds with a particular investment objective, with payments to you determined by the performance of the fund. Fund usually includes a mixture of stock, bonds and money markets.||-||√|
|Equity-indexed, where the value is based on the performance of the chosen stock index||√||-|
|Market value adjusted, you are usually permitted to choose the period of investment and the interest rate of return within established limits. You may be allowed to make withdrawals before the end of the investment period.||√||-|
|Deferred annuity, which is designed for savings, growth, investing and deferred income. Usually can be purchased with a lump sum amount or multiple deposits. Usually appropriate if goal is planning for retirement and you have a relatively long period before you retire.||√||-|
|Immediate annuity, which is designed to pay income immediately after the annuity is purchased. Usually purchased with one lump sum amount (single payment). Usually appropriate if you are near retirement or already retired and you want to turn a lump sum amount into a stream of periodic income amounts, with payments beginning immediately after the annuity is purchased||√||√|
|Fixed or guaranteed period, where you receive payments for a fixed number of years. If you die before the period expires, your beneficiaries will receive payments for the remaining period||√||√|
|Lifetime annuity, with payments continuing for as long as you live, and ceasing upon your death||√||√|
|Joint and survivor annuity, with payments continuing to you for as long as you live,and continuing to your beneficiary - usually your surviving spouse - for as long as he or she lives||√||√|
|Qualified (purchased with assets from retirement plans such as IRAs, qualified plans and 403(b) accounts)||√||√|
|Nonqualified (purchased with after-tax funds that are not held in a retirement plan)||√||√|
|Regulated by state insurance departments||√||√|
|Regulated by the federal Securities and Exchange Commission||-||√|
These are just some general features. Some annuities are customized to include multiple features. For instance, a variable annuity can also include a fixed component to guarantee a portion of your principal and some return on your investment. Check with your provider to determine the specific features and benefits of its annuity offerings.
Fees and Ratings
The fee structure is another key feature that should be reviewed before an annuity is purchased. The fees for variable annuities are usually higher than those that apply to fixed annuities. When choosing an annuity provider, fees should not be the only deciding factor. You should also check the rating of the insurance company. This will help to ensure that you invest with a company that is financially sound. Ratings can be obtained from A.M. Best, Standard and Poor's, Moody's, Duff and Phelps and Weiss Research. (For more on annuities, see Inflation-Protected Annuities: Part Of A Solid Financial Plan, Complicated Deferred Annuity Designations and Watch Your Back In The Annuity Game.)
Work with a qualified financial planner to help you determine whether an annuity is right for you, and if so, which one best suits your financial profile.
3. Determine the Best Time to Take Social Security
Your income from Social Security will help to defray your expenses during retirement; therefore, you should determine the best time to start receiving payments so as to receive the most benefit. (For more insight, read Introduction To Social Security and Retiring Early: How Long Should You Wait?)
For instance, consider the following:
- You can begin to receive your Social Security benefits at age 62; however, your benefits will be permanently reduced.
If you receive Social Security benefits before the year you reach full retirement age, your benefits will be reduced by $1 for every $2 you earn above the annual limit.
In the year you reach full retirement age, your payment will be reduced by $1 for every $3 you earn above the limit in effect for the year, but the Social Security Administration will factor in only earnings before the month you reach your full retirement age.
Beginning the month you reach full retirement age, you can receive your benefits with no reduction.
Consider therefore, that unless you have no choice, it may be in your best interest to defer receiving Social Security benefits until you reach full retirement age.
Lump-Sum Vs. Annuity Payments From Pensions
Many defined-benefit, money-purchase and target-benefit pension plans offer employees two options for distributing their plan benefits: a lump sum payment or an annuity payment. If you are faced with choosing between the two, talk with your financial planner before making the decision. A financial planner will usually look at your other assets and determine whether it would be more fiscally practical for you to receive a guaranteed stream of payment over your lifetime with payments continued to your spouse if he or she outlives you or if you should invest your retirement funds in other assets. (For more insight, check out Pension Law Could Reduce Your Payout and The Demise Of The Defined-Benefit Plan.)
4. Consider a Working Retirement
Reaching retirement age does not mean you have to stop working. If you find your occupation fulfilling and enjoyable, why not work well past the normal retirement age? Enjoying a working retirement not only means additional income, but it could also mean enjoying the benefits usually offered by employers under a cafeteria plan, such as group health insurance for medical, dental and vision, and flexible spending accounts. This can save you significant amounts on funds that would otherwise be allocated toward these items. (To learn more, read Stretch Your Savings By Working Into Your 70s.)
5. Pinch Your Pennies - Now that You Know How Many You Have
Your retirement is a time to enjoy life as much as you can without worrying too much about finances. You can accomplish this state of mind by budgeting. Budgeting, an important component of financial planning, helps you to determine the lifestyle you can afford. Once you use your budget to determine your disposable income, you can make it stretch farther by taking advantage of discount programs available to retirees. For instance, if you love to go to the movies, many movie theaters offer a discount program for seniors that could allow you to see two movies for what it costs others to see one, or some other variation of a discount program. Many other businesses offer discounts to senior citizens. Check official websites for your state and town - many list such programs - and the AARP's website. If you are not sure whether a business offers such discounts, don't be afraid to ask. Many discount programs were started because business owners realized they could build a loyal clientèle of senior citizens who appreciate the discounts they receive from the business. You can help to pioneer such a program at your favorite store. (Interested? Read The Beauty Of Budgeting to learn more.)
Pinching your pennies is not being cheap, it is being thrifty and financially savvy. Don't miss out on the fun of being retired by paying full price when you can do all the same things at a lower cost.
Being financially stable becomes even more critical during your retirement years, as you will likely have less income from current employment and, therefore, will have to rely on your savings and pension. Before deciding when you should retire, work with a financial planner to determine your financial readiness for retirement. Your financial planner should be able to provide you with a comprehensive assessment to determine the plan of action that will guarantee that you do not outlive your assets and that you get the most of your available resources.