Are you between the ages of 55 and 64? Are you preparing to retire in the coming years? Have you saved and invested well enough to provide an income stream in your retirement years? As nothing in life except death and taxes are guaranteed there are some steps you can take to help ensure you will have an income stream in your retirement years in addition to Social Security.
No one has the answers to how much you will need in retirement but you know what you have spent over the previous years and what you are likely to spend in your retirement as well. What you need to do while you are working and after you retire is track or budget your expenses you will have a very good idea as to what you will need from your investments and Social Security to survive month to month when you are no longer working. I am nowhere near my retirement age but I use a budget spreadsheet I developed to track my income and expenses on a daily basis that shows monthly comparisons in statistical and graphic form. If you are interested in my spreadsheet please visit www.retire-debt-free.com and click on the store. The spreadsheet is a digital download and it is very easy to use and works with Excel.
Now that you know what your budget is you will be able to better determine how much income your investments will need to generate for you to pay your bills. Hopefully you have been investing in your company’s 401(k) plan or an IRA in your working years and have a sizeable sum. Now you could invest in Blue Chip stocks and rely on the dividend payments but you have the risk of the dividend being reduced or cut and the risk that the underlying value of the stock will go down. Neither is really a risk you would want to take in your retirement years. Another option is to invest in the bond market and rely on interest payments from the individual bonds, a bond mutual fund or ETF. The problem with this is bonds are not really paying attractive interest rates currently. A third option that I think maybe the better option is to buy an annuity with your 401(k) or IRA if you do not want the risk associated with stocks or the interest rate risk associated with bonds. Many annuities will guarantee a fixed payment for a set number of years or for the remainder of your life. The amount of the payment you will receive will depend on the amount you invest and the length of the payments.
I recently read an article in Kiplinger’s Retirement Report that compared two websites that projected an annuities payment for someone who retires at age 65. On one private company’s website a $500,000 initial investment on an immediate annuity an individual would expect to receive $26,810 annually in payments. This site uses current interest rates, annuity pricing, life-expectancy projections and other factors and feed it into the program to establish an annual payment.
Now the Labor Department also has an on-line calculator to project an annuities annual payment on a $500,000 initial investment for an immediate annuity. This website assumes an interest rate of 7%, a contribution of 3% and does not take inflation into account. With these assumptions the annual annuity payment would be over $35,000. Now almost a $9,000 difference is a substantial amount showing that not all annuity calculators are created equal and you need to know what goes into the assumptions and how accurate they appear to be to you.
No one knows what the future will hold in the investment world but annuities can provide a steady source of income for retirees. One major factor that neither of these sites took into consideration is the gender of the person who is buying the annuity. Look for sites that not only use projected interest rates but current ones as well, consider your health, gender and inflation factors when they project your annuity payment.