Guaranteed Lifetime Income

It is better to have a permanent income than to be fascinating.

—Oscar Wilde

We all need a way to sustain a healthy lifestyle and without income, we’re not going to have the means to live the life that we want.

Income can be generated from your assets, such as a retirement saving plan, real estate, bank and brokerage accounts to name a few.  Another way is through Lifetime Income sources such as a pension, Social Security, or an annuity.  What is Lifetime Income?  It is consistent and predictable income lasting the rest of your life.

If you look up “How much income will I need in retirement?” you’ll generally come across a number like 70–80 percent. What this is saying is that you’ll need 70–80 percent of the income in retirement based on the salary you had when you were working. For example, if you were making $60k a year when you were working, you’ll need $42–46k in retirement to sustain your current level of living. Now this is just a general rule—your own situation might be quite different as you might need more (or less) than those numbers. Keep in mind, this figure does not take inflation into consideration. Inflation is the cost of goods appreciating over time, so you might need more in ten years than you need today.

Those percentages may work if you plan on retiring at sixty-five. However, if you’re looking to retire at age fifty, a good rule would be to try and live off 50 percent of what you were making. If you plan on retiring at age forty, then try to live off 40 percent of what you were making.

The first place to start when looking at your retirement income is looking at your lifetime income sources.  The only sources of lifetime income are going to be from a pension, social security, or an annuity.

Pension

If you work for the Federal, State or Local Government, the military, many union jobs and some corporations, it’s possible you may have a pension benefit that you can count on when you retire early. Having a pension you can turn on before age fifty-five is a huge benefit. Many corporate pension plans are based on the model that if you have worked twenty years and are age fifty-five, you can turn on your pension if you leave the company. If you worked less than twenty years at the company, then you’ll have to wait until you’re sixty-five until you can turn it on.

Over the past twenty years, pensions have been dying off. The main reason is because people are living longer. In the 1960s, a male’s life expectancy was around sixty-six years old and a female’s was seventy- three years old. So, if you were a male and retired at age sixty-two, you had four years of life expectancy left. Four years isn’t long for a company to pay out a pension. Nowadays, the average life expectancy for males and females is in the eighties. It’s common for a corporation to be on the hook for twenty or even thirty years paying a pension. Many companies have run the numbers and have found pensions are too expensive and eliminated them.  If you have a pension, count yourself lucky.

Social Security

The Social Security Act was passed into law back in 1935 and the first monthly check was issued in 1940 for $22.54. For many years, you had to wait until age sixty-five to collect your social security. In 1961, another law passed that enabled folks to take a reduced benefit at age sixty-two. In 1983, again, another law raised the full retirement age to sixty-six and two months for those born in 1955 or later. In the ensuing years, the retirement age will gradually increase to age sixty-seven for those born in 1960 or later.

Social security has been called the world’s largest annuity because, like an annuity or pension, it provides an income stream that you can’t outlive. When it was first enacted, it was called social insurance because the country was still recovering from the Great Depression in the 1930s. The country needed a program to assist older folks who had very little money to take care of themselves. Much of social security is funded through payroll taxes, so, for example, in 2021, you paid into social security up to $142,800 of your earnings.

Annuities

Social Security, pensions, and annuities all provide lifetime income and are the only three items that can. Matter of fact, social security is deemed the largest annuity in existence.

What is an annuity?  An annuity is a contract with an insurance company that provides a payment stream for the rest of a person’s life. They come in a variety of products.

Social Security is a program that you pay in to and then at age sixty-two or later, you can get a lifetime income stream.  Pensions are provided by employers as an incentive and benefit for employees that stay with them for a prolonged period. Annuities provide an opportunity to set up your own personal pension plan, which will provide you a lifetime income stream. Most annuities are very predictable in the income they provide whether you start income immediately or choose to defer the income and start it years later.

Be careful. There are two types of income streams that annuities offer, and you need to know the difference between them. One annuity income stream is called a lifetime income rider. This is an income benefit (rider) that can be added on to your core annuity contract. These income streams are generally flexible—you’ll be able to start the income payment, stop it, increase your payment, and decrease your payment—you are in control of your money. The second annuity income stream is called annuitization. This is when the annuity company sends you payments for a specific period or for the rest of your life. The tricky part here is that you lose control of your money. Once the payments are set up, there is no going back.

Knowing you have a set number of dollars coming in each month will give you the confidence that your needs will be met no matter what the stock or bond markets are doing.