You’ve done everything up to this point to set yourself up for success while in retirement. You started early, maxed out your qualified plans, diversified your portfolio, and never withdrew a penny. But now comes the most difficult part for retirees: to make sure you don’t outlive your money!

In this episode of Money Script Monday, Joe shows you how to set aside a portion of your retirement savings to create a guaranteed source of lifetime income.

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Video transcription

Hello. My name is Joe Schweiger, and welcome to another episode of Money Script Monday. Today, we're going to talk about turning your qualified accounts into a guaranteed stream of income.

When we look at the retirement landscape, it's changed dramatically over the last 40, 50 years. Today, we're going to talk a little bit about that transition from a defined benefit over to a defined contribution.

We're going to then talk about the psychological mind shift that needs to happen with retirees today, and then we'll actually get into an example of how an annuity can help you accomplish those goals.

Defined Benefit Era vs. Defined Contribution Era

When you look over the last 40 years, back in 1970s, there was a big transition from defined benefits to defined contributions.

Defined Benefit Era

When retirees were planning their retirement, they didn't think too much about their own personal savings because their retirement looked like the pyramid below.

At the base of it, you'd have your pension income which was put on by your employer, followed by social security and then their own personal savings.

In 1970s, employers started to realize that this may be too expensive of an option to provide their employees.

There were administrative costs each year, there were penalties if the plan wasn't funded properly, and, again, it was just too expensive.

So the transition happened, and defined contribution plans came along.

Defined Contribution Era

What that did is it changed the benefits that were going to be received by the employees.

It lowered the cost for the employers, and it transitioned the actual retirement planning onto the employee.

The triangle above is more of what someone's retirement will look like today.

You start with their savings or their 401(k)s, their defined contribution plans at the base of their retirement, then followed by Social Security, and then if someone's lucky enough to have pension income, that will be the top part of that pyramid.

But, again, unless you worked for a government agency or some type of union, you most likely won't be receiving pension income.

What that means for most employees and retirees today, is that we need to shift our mindset.

Mindset Shift

While we're accumulating for retirement, the idea is to grow a retirement balance or a nest egg.

When we look at retirement, we should think of it more in terms of income and an income that you can't outlive.

When we have a pension income, it's not really a balance that you can walk away with, although there are certain plans that will basically buy you out and you can take that money elsewhere.

But really, it's the guarantee of having retirement income for the rest of your life, and potentially, your spouse's life.

That safety and that guarantee can help people be a little bit more at ease during their retirement years so they can enjoy retirement, opposed to worrying about when they will run out of money.

Having that balance is great to accumulate and have a big retirement balance during those beginning years.

But what happens when you live 30, 35 years in retirement?

You start spending it down, especially in those later years when you may need that the most.

That can be a psychological drain, and not just you, but all your loved ones, your family, and the people that will have to inherit some of the debt that you may have to go into if you do run out of money.

When we think about a product that can actually help us accomplish this goal of guaranteed income, there's really only one that's out there, that's an annuity.

Whether that be a single premium immediate annuity, a deferred income annuity, or many other forms, it is an annuity.

When you take a large balance and put it into a product and have that income start, it's an annuity, and that's actually what a pension is.

Your employer, in the old days, was putting in all these funds into an account and eventually, was going to annuitize it for the benefit of you and your spouse.

Fixed Index Annuity Scenario

This example is a product that we commonly use.

We're going to have a 50-year old male that has that premium of a million dollars.

When we think about what an annuity actually is, it's really just a contract between a policy owner and an insurance carrier, and it's in exchange of money.

The policy owner gives the insurance company money, in return, you get a contract that states certain guarantees that has other provisions in there that can help you accomplish certain goals that you want to have.

With this annuity, and with most fixed index annuities, they do have additional riders you can add on there.

For this example, we're adding on an income rider that will then, in turn, give an income stream for either the whole life of yourself, or your life of you and your spouse.

When we look at this example, we're putting in a million dollars.

This particular product has a 20% bonus for that income account.

For the other 10 years that we have the funds in there, we're going to assume no growth. We're under-promising here because there's never been 10 years where there's no interest credited in a certain annuity.

Because most annuities shadow a certain index, and that's what an index annuity is, it has different types of allocations you can choose to put that money in.

As that grows, you can earn up to a certain cap, or maybe use a participation rate to accumulate inside of that.

With this example, we're showing very base guarantees.

We're putting in the million dollars, we get that 20% bonus and in 10 years that balance is still going to be $1.2 million because it's had no growth.

At age 60 for this product, it has a withdrawal rate on that income account of 5%, which would guarantee $60,000.

Other benefits with these type of annuities is that it does have the potential for increasing income in case of inflation or other things that may happen that you'll need more money for.

$60,000 maybe in 20, 30 years could eventually be $85,000, $90,000 which is an extremely big benefit for retirement especially as inflation can help erode part of that retirement balance.

I hope you found this useful. If you or anyone you know is planning on retiring, I think it's extremely important to sit down with your financial advisor.

Thanks again for tuning in to today's Money Script Monday. We'll see you next time.