The hypothetical scenario: ‘You’re in your mid-60s and finishing your last year of working. You and your wife both receive Social Security totaled at about $20,000 per year and you have about $500,000 in your IRAs. With your job you’ve been breaking even spending about $45,000 a year. You’re a conservative investor.
Question: What retirement investment options do you have to replace your job’s earnings so you don’t run out of money but also to leave something for your children?
Here are a few considerations:
When you stop working, some expenses will disappear (e.g. commuting, lunch, business clothes). So you might need to generate less investment income than the $25,000 of expenses not covered by your social security income.
Straight withdrawal from IRAs. A conservative annual retirement withdrawal rate of 4% from the $500,000 in your IRAs will produce $20,000 income per year. Such a low withdrawal rate may allow your IRA savings to maintain its real value against inflation’s damage – even for a portfolio equally balanced between equity and income. You of course have the investment option of holding a higher ratio of equities for high longer term returns.
Rely on dividend-paying stocks. It’s an advantage to a company to consistently pay dividends – and even through market ups and downs. You can construct a portfolio of some 25 high quality companies whose stocks both pay regular dividends and have shown these dividends consistently to rise with earnings (note that past performance is not a guarantee of future results). This ‘rise-with-earnings’ dividend approach helps you keep up with a rising cost of living. And you’ll have equity to leave to your children. One retirement investment option that makes this strategy into a formula is the dow dividend strategy.
Split your IRAs and buy an immediate annuity. Take about $300,000 within your IRAs to purchase an immediate annuity. This retirement investment options would guarantee about $23,000 annual income for the rest of both of your lives. But, remember, there’s no money left over in the annuity when you both die. However, you can invest that remaining $200,000 in your IRAs more aggressively if you’d like since your annuity and your Social Security are together meeting your income needs. So whatever you’re able and willing to grow that $200,000 to – will be your legacy.
Note: Annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses. Distributions from IRAs are taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.
förlovningsringar says
Very interesting stuff, Retirement is closing in and all I can think of is saving money. But I sure as hell need a better plan.
Carmen @HomeBusinessIdeas says
When one is in your 30’s and working your butt off often just to survive from month-to-month, one seldom takes the time to think of how you will survive your retirement. It is good to know there are still feasible ways of doing this later in life.
I however think it is more important to change the mindset of the young to ensure that savings plans, annuities and processes are put in place early enough in life to ensure that a nice nest-egg has been built up when retirement comes around.
Velo says
Thank you for the very informative article. I’ll be sure to follow your tips. I am also going to discuss some of these points with my financial advisor. Thank you so much for looking out for us old people. We need help in this crazy world.
SEO says
I have to prepare my retirement from now and gold is good option for saving.
Dale Green says
Straight withdrawal from IRAs,This is the most conservative.Because you retire.I think this is the best way.You don’t need to take any risk.To enjoy your retire life.
fikri91 says
i still at 20…
and yet this atrticle change my point of view
Chris says
There is a lot of buzz out there about annuities and annuity-like products surrounding the retirement income topic. With a volitile market, annuities can allow you to maintain your principal investment and recieve a monthly income from the growth, however they are not the only option. Many people are actually using their IRA to invest in strong and secure investments out side of the stock market. In many cases, you can use your IRA to generate a monthly income WITHOUT ever damaging the principal investment. Bottom line, Annuities are not the only option when it comes to safe and secure retirement income.
Chicago Wealth Management says
Your blog contains exactly that information which I was searching for so long time. I am also going to retire this month and I think that Retirement is closing in and all I can think of is saving money. But I sure as hell need a better plan. Thanks for helping me.