Best Sources of Retirement Income

As the eyes of 70 million Baby Boomers turning towards their imminent retirement, their focus is quickly shifting towards their future financial security. Many people are awakening just now to the prospect of living another 25-plus years in retirement and few feel as though they have prepared adequately. Add to this the increased uncertainty that has enveloped the economy and the markets, and it becomes even more critical to start planning ahead to establish your best sources of retirement income.

it’s not Your Father’s Retirement Anymore

When considering retirement income sources, today’s pre-retirees need to contend with certain risks that their parents and grandparents didn’t. Retirees of past generations didn’t really have to concern themselves with the risk of living too long (longevity risk). The life expectancy of retirees in the 1960s and 1970s was 73 which meant that people generally lived about 8 years in retirement. Because of that, there wasn’t much concern over the cost-of-living (inflation risk). And, because most people received guaranteed income payments from a pension plan back then, they also weren’t too concerned about which way the markets were going (market risk).

That has changed for today’s retirees who face all three risks. So, planning for retirement is now as much about choosing the right income sources as it is accumulating a sufficient retirement fund. The unfortunate fact is that people today are still not saving enough, and those that worked hard to do so may have experienced a serious setback with the severe market declines of 2000 and 2008. So, for most people, the more critical planning decision is which income sources will provide the greatest amount of security.

Guaranteed Income Annuities

At the top of the list for an increasing number of people are income annuities. Once thought to be too conservative, income annuities are now coveted for their income predictability and stability. Moreover, they are the only vehicle that can put to rest any concern about outliving your income. When a lump sum of money is exchanged for a guaranteed stream of income, a life insurance company will not only guarantee your payments, it will ensure that, no matter how long you live, you will always receive them. And, if you choose to add a cost-of-living adjustment option, your income will keep pace with the rate of inflation. Payout options are available on multiple lives so you can ensure that the income will be available for your spouse as well.

You can also choose to invest in a variable or indexed annuity that will generate income payments commensurate with the growth of the markets. Many of these annuities explained offer downside protection with minimum income guarantees, so you can benefit from the higher market returns without risking your income.

Target Date Mutual Funds

In response to the waves of retiring Baby Boomers, mutual fund companies have introduced a new type of fund that actually targets your retirement date in establishing the mix of investments for the fund. These funds invest in various asset classes, such as stocks, bonds, retirement and cash vehicles, to reflect your evolving stages of financial need and risk. For instance, the investment allocation of a younger person will lean more heavily towards stocks and growth investments. Then as the person ages, the allocation will gradually shift towards more conservative investments. The growth target for the funds is based on a retirement income requirement of 4% of the fund’s value over the life expectancy.

Obviously, these funds, with their exposure to the stock and bond markets, entail market risk, however, they are professionally managed and well diversified so risk over the long term is reduced. Because these funds target specific dates, it is recommended that you invest in more than one that will target different stages of retirement. For instance, a fund targeting a retirement date of 2025 will invest more conservatively than one targeting a date of 2030. This will allow a portion of your funds to continue to work a little harder to ensure adequate accumulation.

Make Retirement a Career

Most people today envision themselves doing something in retirement to keep active, and, perhaps, pursue a new vocation or even a business opportunity. Retirement today is much less a stage of life as it is a whole new life cycle with new opportunities to learn, grow and earn. For many people, working in retirement will be more of necessity than a desire. But, there’s no reason why anyone can’t make a career out of retirement. The most popular form of earning an income in retirement is through a small business. It could be as simple as monetizing a favorite hobby, or more elaborately, investing in a franchise of some sort. The best way to create a steady income stream from a business in retirement is to get your business started now. Everyone can use an extra source of income while saving for retirement, and when you’re ready to leave the rat race, your business income will more established and stable.

Which is the Best Source of Retirement Income?

Of course, there is no single best source of retirement income. The best strategy for creating a secure and growing income stream is to combine several different sources in order to be able to confront the certain risks of longevity, inflation and market fluctuations. You can’t avoid these risks, they are inherent in everything you do to prepare for retirement. So, the best course is to diversify your income sources to create a layer of stability, a layer of growth, and a layer of long term security.