Turning Retirement Savings Into Income

For many Americans planning for retirement, a common worry is whether their retirement savings will last for their entire life. Having stable finances and adequate savings provides peace of mind during retirement.

On the other hand, exhausting retirement savings prematurely leads to stress during a time that is supposed to be relaxing and enjoyable. Workers can avoid monetary issues while being retired by financially preparing for the future. This way, seniors can live comfortably on their savings and enjoy being retired without having to worry about running out of money later in life.

There are a number of methods that can be employed to ensure that your savings will last throughout your life and to maximize the money you have already saved for retirement. Some common methods of maximizing retirement savings are annuities, investments and fixed withdrawal rates. Consider the following information to learn what methods to increase savings amounts can be used in your financial situation.

Annuities

An annuity is a contract between a retiree and an insurance company, who provides income to the retiree for the rest of their life starting at a certain time after premiums are paid. Annuities provide seniors with a guaranteed, stable source of income after retirement. Immediate annuity and deferred annuity are two different forms of annuities that you can use to maximize your retirement income.

Immediate Annuity

This form of annuity is the most popular with retired seniors. In an immediate annuity, a retiree can start collecting payments up to one month after paying a lump sum to an insurance company. The payment amounts for each month depend on how much a person pays as the lump sum amount. Immediate annuities are useful for supplementing retirement income after Social Security and other forms of income have been paid to a retiree. Because the turnaround rate for this form of annuity is very quick, the interest rates can be low, meaning the payments from an insurance company will not increase very much over time.

Deferred Annuity

In a deferred annuity, insurance companies begin paying retirees after a long period of time. This form of annuity is beneficial for seniors with a long life expectancy. After a period of making premium payments, seniors transition into the payout period during retirement. Premium payments are tax deferred in order to supplement retirement accounts and/or plans. Deferred annuities can be converted to immediate annuities if the retiree wishes to switch plans.

Investments

Making investments is a great tool in maximizing retirement savings. There are many different options available for Americans to begin investing during their lifetime. You should participate in the types of investments that best fit your needs and financial situation. Investing early is the best tactic for increasing your money supply over time. To learn more about investing, read the following information about the types of investment accounts available in the U.S. and kinds of investments a worker can make.

Types of Investment Accounts

There are three main types of investment accounts that can supplement retirement income. These types of accounts are:

  • 401(k)s, also known as retirement accounts, are investment accounts offered by an employer. Workers who invest in 401(k) accounts grow their invested money tax-free until the funds are withdrawn. Money invested into a 401(k) is also tax-exempt.
  • IRAs, or individual tax advantaged retirement accounts. IRAs are similar to 401(k)s where investments are tax-free and tax-exempt. However, this type of investment account requires different eligibility than 401(k)s in order to invest.
  • Regular investment accounts with no tax advantages. This type of account is not advised for retirement savings.

Main Forms of Investments

There are three main forms of investments that Americans can purchase. These kinds of investments are stocks, bonds and cash. The safest option for investing in one or more than one of the following investments is through a mutual fund.

Stocks

Stocks are investments where workers buy a stake in a company to become a partial owner with a claim on earnings. This form of investment can be risky because stocks are subject to the rise and fall of business profits. Stocks can be sold for gains when the value of rises over time. Dividends are payouts sometimes issued by businesses to stock shareholders, where a regular payment is provided to shareholders over time despite the current price of the stock. Dividends are good ways to accruing steady income through the purchase of stocks. Shareholders can reinvest dividends in order to make higher returns.

Bonds

Bonds are a form of investment where workers loan money to companies for a certain period of time. This money is used to fund the daily costs associated with running and/or growing a business. Bonds collect interest over time, and investors eventually receive the entire bond amount back. Bonds are less risky than stocks, and pay regularly to allow for steady source of income that supplements retirement payments. Payments from bonds are usually tax-free. A common, safe bond to invest in is to the U.S. Treasury.

Cash

Lastly, a cash investment is a short-term investment option, where income is made through interest on payments. Cash investments have a low level of risk and are usually insured by the FDIC. However, this form of investment usually has a low return in comparison to stocks and bonds. In some cases, cash investments can be applied toward a certain bank account where they will grow in interest over time.

Fixed Withdrawal Rates

Using a fixed withdrawal rate throughout retirement is a way to calculate whether your retirement income and savings last for a long period of time. A fixed withdrawal rate of around 4 percent has been suggested for seniors to use during retirement. However, you should keep in mind that inflation and rising prices will affect how much a fixed withdrawal rate will cover any given year. For example, areas with increasing inflation rates mean the cost of living will rise over time. In this situation, a fixed withdrawal payment does not account for the rising cost of living prices. Overall, calculating a fixed withdrawal rate to use during retirement can be a beneficial tool in managing your finances, but finding supplementary forms of income to account for inflation and increase savings is highly suggested.

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