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Calculating income for retirement

How much guaranteed monthly income will I need in retirement?

by Joseph Arroyo | Contributor
September 10, 2020


You work hard and make sacrifices to save for a secure retirement – how can you get the most out of it? Having streams of guaranteed income can give you comfort and peace of mind for your retirement. If you know how much is coming in every month, you can budget well and get the most out of your retirement assets. In this article, we’ll review some common expenses in retirement and look at ways to boost your guaranteed income.

Will my expenses go down in retirement?

It is a common assumption that expenses decline in retirement, but like many commonly held beliefs, this isn’t always the case. As part of your overall retirement plan, you should make plans for higher or unexpected costs in retirement. You may well face higher and growing expenses in some of these areas:

  • Health care
  • Long-term care
  • Housing repairs

Health care costs rise every year. Medicare is a very valuable benefit, but if your employer currently pays for your health insurance, you’ll have a new expense when you start Medicare Part B. If you add a Medicare supplement insurance policy to cover your out of pocket expenses, you’ll be faced with these new monthly costs:

  • Part B premium
  • Medicare supplement plan premium
  • Part D prescription drug plan premium

This combination of coverages will definitely lower or eliminate out of pocket costs for health care, but each of them comes with a monthly premium that you weren’t paying before you retired. You’ll need to budget for these essential costs.

Long-term care is a growing worry for people approaching retirement age, and it’s no wonder: Long-term care is very expensive. Long-term care costs can be $6,800 per month, and assisted living expenses average $4,000 per month. These kinds of costs are not covered by Medicare, so you’ll have to use your existing assets to pay for these services.

Long-term care and assisted living would both replace your housing costs, which can help. However, you might prefer to stay in your home and utilize services like home health care or adult day health care. These services come with fees and costs that you’ll have to pay for from your savings or your monthly income.

While many people downsize in retirement, if you keep your existing home, or move to a new one, you have to be prepared to pay for major expenses for the upkeep of your home, or to pay the deductible on your homeowner’s insurance. If your roof needs to be replaced due to age, you’ll have to come up with the cash, for instance.

Where can I look to cut expenses?

While nobody wants to feel like they must pinch pennies to survive, it’s always a great idea to limit your expenses where you can. Some common expenses that can be reduced include:

Woman on tablet accessing the internet with overlaid graphic
  • Housing
  • Cars
  • Choosing Medicare Advantage instead of Medicare supplement insurance
  • Eating out less
  • Relocating to a lower cost region, state or city

You might sell a large house and purchase a smaller, less expensive one. Or buy a condo. Likewise, you may not need two cars in retirement, allowing you to sell one or more vehicles. Depending on where you live, Medicare Advantage plans can offer generous benefits, including prescription drug coverage, for little to no monthly premium.

Not all of these reductions need to feel like sacrifices. Instead, if trimming a bit here or there allow you to travel more, or pursue a beloved hobby, then you’ll feel good about cutting back in other areas.

How much is enough monthly income?

Through your 50s and early 60s, you’ll need to put a plan together for your retirement. You’ll need to make an honest assessment about your anticipated expenses in retirement. Be sure to include:

  • Housing
  • Car payments
  • Health insurance (all costs, including premiums, co-pays, prescriptions, etc.)
  • Utilities
  • Food and entertainment
  • Travel (make some specific plans and use realistic costs)
  • Emergencies

If possible, eliminate housing and car payments. For many people, there are the two largest expenses they’ll face in retirement. If you can pay them off before you retire, so much the better.

On the income side, you might have access to these sources:

  • Your Social Security
  • Your spouse's Social Security
  • Your pension
  • Your spouse's pension
  • Your nest egg
  • Your spouse's nest egg
  • Guaranteed annuity income
  • A part-time job

What are guaranteed sources of income?

Guaranteed income is just what it sounds like: income you can count on from month to month. It’s not subject to market ups and downs, or interest rates. Guaranteed income can include:

  • Social Security payments
  • Pension payments
  • Annuity payments

Note that money generated from your nest egg doesn’t qualify as guaranteed. This money will likely be invested (at least to some extent) in the stock market, which can decline, or bonds or CDs, which can vary based on the movements of interest rates.

Moving graphic offereing information on fixed index annuities

Annuities, on the other hand, are designed to pay steady income payments over the course of your life. An annuity is just that: a guarantee from an insurance company to pay a specific amount of money for a specific amount of time.

In the past, annuities have been neglected because they generally paid a fixed, but low, interest rate. These interest rates were often well below anything that you could earn in the stock market. Because of this, people with money in annuities felt like they were missing out on large investment gains.

To avoid this, insurance companies came out with indexed annuities. These annuities offer the ability to earn interest based on the performance of one of more investment indexes. These indexes can include:

  • U.S. stock markets
  • International stock benchmarks
  • U.S. and international bond indexes
  • Many more

With an indexed annuity, you set some or all of your annuity’s interest rate to be tied to the index or indexes of your choice. The best part is that these annuities are still “fixed”, which means that you won’t lose money if your indexes perform poorly. At worst, you’ll earn 0% during a year. This is a huge benefit in years where the stock market declines by 20% or 30%.

By utilizing indexed annuities, you can grow your balance at much higher interest rates than annuities from the past, making them very useful wealth accumulation vehicles.

You can fund annuities, including indexed annuities, in two ways:

  • Make ongoing deposits (premiums), or
  • Make one lump sum payment

You can let your annuities accumulate interest for as long as you want (although you may need to take required minimum distributions eventually). Then, when you’re ready to receive monthly payments, you “annuitize” your annuity, and the insurance company gives you several options for payments, including:

  • Guaranteed income for the rest of your life
  • Guaranteed income for the rest of your AND your spouse’s life
  • Guaranteed income for the rest of your life, or a certain number of years (generally 10), whichever is longer

You can pick the payment option that provides you with the most financial security. These guaranteed income streams will be available to help you pay expenses and meet your goals in retirement.

Guaranteed income and your overall retirement plan

As you approach retirement age, be sure to assess your finances including your expected income and expenses. You also can boost your guaranteed monthly income with fixed index annuities. Make sure you make investment decisions with your retirement professional; don’t jump in without a plan.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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