Saving money for retirement is one thing. Spending it is another.
Despite amassing wealth, many retirees aren't willing to open their wallets when the time comes. They worry they'll outlive their nest egg and, as a result, underspend, live below their means or leave it all to heirs.
A recent Corebridge Financial survey demonstrated that fewer than one-third of retirees feel comfortable spending their savings, with most noting the prospect causes stress or anxiety.
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"You could have done a bang-up job putting money into your retirement accounts and grabbing all the matching dollars, and you get to the end of the road and be so deeply uncomfortable seeing that balance go in the other direction," says Jean Chatzky, founder of HerMoney. "You don't spend it, and I think that is really sad, because what is the purpose of all that delayed gratification if not to support yourself in a certain way during your 20 or 30 years in retirement?"
There are several do-it-yourself (DIY) strategies that can help retirees spend more, such as the 4% rule, the bucket approach or setting up guardrails, but they require action. A set-it-and-forget-it way to spend more is with guaranteed income. It takes a portion of your savings and turns it into a monthly paycheck: peace of mind, with some caveats.
What is guaranteed income in retirement?
When the paycheck stops, uncertainty can set in. Guaranteed income helps alleviate that by providing a stable monthly paycheck. For some retirees, Social Security is their only source of guaranteed income. For others, it's Social Security plus a pension.
Individuals who need more income to cover daily expenses can convert some of their retirement savings into guaranteed income paid regularly. Instead of withdrawing money as they go, they get set paychecks.
You can get guaranteed income through investments or an annuity. The latter is often the choice for retirees who want an easy way to guarantee a portion of their savings.
"You can create an income stream that is sustainable with bond ladders, with dividend-paying stocks and with other income-producing investments, but they don't have the guarantees that annuities have," said Chatzky. "By the same token, annuities don't have the upside that investments do."
When determining if an annuity or an investment approach is right for you, Chatzky said it's important to know yourself. If you're financially savvy and aren't afraid if income fluctuates based on the market, then creating guaranteed income with investments might be right for you. If you're risk-averse and want the same amount each month, then an annuity might be the better option.
Why does it give retirees peace of mind?
There are lots of reasons guaranteed income gives retirees peace of mind and, more important, permission to spend in retirement, including:
- It limits market volatility risk. Knowing your essential expenses are covered each month means you won't react badly to market downturns and stop spending.
- It limits longevity risk. Guaranteed lifetime income means you won't outlive your money.
- It provides psychological permission to spend. You'll feel less guilty spending when you're receiving a regular paycheck.
- It makes budgeting easy. Fixed monthly deposits simplify cash flow, making budgeting easier in retirement.
"It makes people more inclined to feel comfortable and confident in retirement," says Denise Beaulier, Wealth Management Advisor with Northwestern Mutual and Partner at LiveWell Capital. "It puts less pressure on their investments to sustain what is hopefully a long retirement."
But that peace of mind comes at a cost if you choose an annuity. Annuities tie up your money, and getting it out typically comes with steep surrender charges. Unless you pay extra, your annuity might not keep up with inflation.
Is guaranteed income right for you?
Guaranteed income is right for you if your Social Security and/or pension income doesn't cover your monthly expenses and/or you're losing sleep over cash flow. It's less appealing if your Social Security and pension income covers your monthly expenses or you have the knowledge and expertise to withdraw money on your own.
"If you have an $8,500 pension, guaranteed income doesn't make sense at all," says Beaulier. "But if you only have Social Security and no pension, with this you may be more inclined to live life intentionally."
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