Everything you Need to Know About Lifetime Income Options

With advancements in modern medicine, people today live longer than their ancestors. America is expected to have 589,000 centenarians by 2060, as opposed to 82,000 in 2016. While humans have been chasing the idea of a long life for many decades, the one problem that people are still tackling is generating enough income. 

For a person retiring at the age of 60, who goes on to live till the age of 100, retirement can last for 40 years. This can be a significant amount of time to survive in the absence of a job and steady revenue. However, some lifetime income options can ensure that people have the necessary financial support throughout their life. 

Traditional Plans

For most retirees, the ideal retirement fund is a 401(k) account or an employer-provided pension plan, where they contribute throughout their working years to build a corpus. However, no matter how much a person saves, it can still be hard to account for the varied expenses that may come up in retirement. In addition to this, it is hard to preempt how long a person’s retirement will last.

To tackle these problems, here are some lifetime income options available to people looking for continued financial support for as long as they live. 

Annuity plans

These plans give investors the option to convert their retirement accounts into an income annuity. Many insurance companies offer these plans and allow investors to withdraw a fixed amount of money each month for the rest of their lives. In return for a guaranteed income for a lifetime, investors invest a lump sum amount with the insurance company. This is one of the most convenient options for generating a constant pool of income for retirees. However, the reputation of the insurance company plays a crucial role here. It is important to pick a credible company with a strong financial standing.

While income annuity options are a great way to ensure continued funds, they can be problematic in case of unpredictable financial emergencies that may require lump sum savings. The advisable thing would be to create a balance between traditional retirement savings and income annuity. 

Guaranteed Minimum Withdrawal Benefit 

Guaranteed Minimum Withdrawal Benefit or GMWB is a rider that can be bought with fixed or variable annuity insurance plans. With GMWB, investors can expect a constant flow of income regardless of how the market functions. Investors can withdraw between 5% and 10% of their investment depending on their age. However, retirees can only make withdrawals after the age of 59.5, or else they will be liable to pay a 10% penalty. 

Target Date Funds

Target Date Funds or TDF offer a blend of equities and fixed income that make for a sound retirement fund option. Just as the name suggests, TDF works on a future date or target. Investors can invest in TDF in their 20s with a goal to retire in their 60s or 70s. The investments made in the initial years are more aggressive. As time passes and the investor nears retirement, the investments are more passive with low-risk intensity. TDF investments are managed by a portfolio manager. 

Unlike traditional retirement accounts, TDF can be extremely helpful in covering the costs of inflation. The fund manager invests a major part of funds in equities in the initial years, which substantially increase an investor’s cumulative capital. The accumulated funds over the years can be used as regular payouts after retirement. 

Bonds Ladders

With bond ladders, investors buy individual bonds with differing maturity dates. When these bonds mature at varying intervals, investors get to enjoy the funds at different phases in their life. This creates a regular flow of income for retirees. For example, the first bond can mature at the age of 60, the next in 5 years, and the next after another 5 or 7 years. With careful planning and execution, retirees earn a steady flow of principal and interest from these bonds for a lifetime. 

Bonds are also relatively risk-free as compared to other tools of investment. This makes them suitable for passive investors. However, the income generated from bonds can be less than income annuity. 

Managed Payout Fund

The Vanguard Managed Payout Fund offers investors regular monthly income in retirement. The distribution rate is set at 4% based on how the fund performs. These funds can be easily accessible and offer high liquidity. However, the distribution depends on the fund’s performance and can, therefore, be unpredictable. For some years the payouts can be extremely high, and other years the payouts can be negligible, making it hard for retirees to account for all expenses. 

On the brighter side, the yearly expense ratio for the fund is only 0.34%, so investors end up saving a lot of money otherwise spent on manager fees. A payout fund also offers more security to the family and can be transferred to a spouse in case of the fund owner’s demise. 

To sum it up

Retirement can be an unpredictable phase in a person’s life. It is hard to anticipate the costs of inflation, future expenses, health issues, and how long one may live. Simple saving methods like a certificate of deposit, a 401 (k) account, and an employer-funded pension plan, etc. offer an investor peace of mind and are great for tackling lump sum expenses, as well as day to day costs. However, investing in these lifetime income options can bring more security and flexibility to a financial plan. 

Do you want to invest in any of these lifetime income options? Get in touch with financial advisors to know how and where you can start.