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Carla Fried: Enjoy more retirement spending, less stress with a retirement income strategy

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Most people nearing retirement must face down a ridiculous challenge embedded in our flawed 401(k) and IRA retirement system.

After decades of saving for retirement, you’re pretty much on your own trying to figure out how to invest and use that money in retirement so it gives you the income you need yet doesn’t run dry over what can be a very long retirement.

As if you ever signed up for the job of pension manager.

There’s a simple strategy that can solve that problem. And in the process, the strategy makes it possible to responsibly spend more than most people otherwise would in retirement.

Guaranteed income to cover expenses

The trick is to devise a retirement income strategy that generates a consistent income payout from sources that are guaranteed to keep on paying out no matter how long you live, or how far the stock market might dive from time to time.

Your Social Security benefit is guaranteed income for life. Even better, it is adjusted to keep pace with inflation.

Some people will also have a pension, which is another guaranteed income source.

If you don’t expect those guaranteed income sources will give you an adequate monthly income, you’ve got your 401(k) and/or IRA money to tap.

And that’s where things get messy, right? How much to withdraw? How to invest it? What happens if you live to 95? 100?

Even if you have the good fortune of starting retirement during a calm (profitable) time for stocks, you’ve still got the job of managing all of that, or hiring someone to do it for you.

But there’s another option: Take a chunk of your 401(k) and/or IRA savings and buy more guaranteed income.

If you are willing to convert some of your savings into an income annuity you could be able to reach retirement nirvana: knowing all your bills are covered by income payouts that will never lose value.

What price for peace of mind?

OK, you likely just bristled at the mention of annuities. Understood.

If your dislike is that you don’t want to be taken advantage of and sold a too expensive annuity that underdelivers, that is entirely reasonable. Bad annuities definitely exist, as do the insurance agents selling them.

But we’re talking about straightforward, easy-to-understand and fairly priced income annuities.

Or is your issue that you just can’t imagine spending a chunk of your savings on an income annuity?

Maybe that is a bridge too far.

But at least take a fresh mental spin through what you gain: peace of mind knowing you have all your basic living costs covered by income sources that will not lose value.

And it’s likely you will not need to use all your savings to purchase an income annuity to complement your other guaranteed income. Let’s say your Social Security benefit leaves you $300 or so a month short of covering all your essential bills.

At current annuity pricing, a 65-year-old woman could lock in an estimated $350 a month by making one $75,000 lump sum premium payment for an income annuity for the rest of her life. For a 65-year-old man, the payout would be around $370 per month.

If your hang-up is the possibility that you could die just months after paying the premium, there are types of income annuities that address your concern. The trade-off is that your monthly payout will be lower.

For instance, a “lifetime + 10-year certain” income annuity will deliver you payouts for your lifetime, but if you die within the first 10 years, your beneficiary continues to get the payouts through year 10 of the policy payouts. This option might reduce your payout by 2% or so compared to a straight-up income annuity.

A “life + cash refund” delivers payouts for your lifetime, but if you die before receiving payments equal to your premium, the insurer will refund the difference to your beneficiary. The trade-off is that your payouts might be 10% or so less than what you would get with a straight-up income annuity.

You can get income annuity estimates at ImmediateAnnuities.com.

Annuity added bonus: freedom to spend

If you do cover all your living costs with guaranteed income, chances are that you will have the confidence to spend more of your remaining investment portfolio – if that appeals.

A new research paper analyzed spending among households that are in retirement and have at least $100,000 in savings. They found that a household with a pension and no savings will spend more than a retiree with enough savings to buy an annuity that would generate the same income as the pension.

The retirement saver is not irrational or misguided. Just coping with a retirement system that leaves them with a pot of money at retirement, and the headache of managing market downturns, the risk of long periods of sub-par returns and their own potentially long life span. That’s a lot to worry about, hence the tendency to spend less than one could from investment accounts.

An income annuity removes the worry of how you will pay for living costs. And that has a literal payoff. In “Guaranteed Income: License to Spend,” the researchers estimate that every $1 converted to guaranteed income results in the retiree spending twice as much as they would if that $1 was left in investment accounts.

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