How to turn retirement savings into retirement income

Transcription

1 How to turn retirement savings into retirement income

2 To avoid outliving your retirement savings, it's important to consider ways to make your money last.

3 You ve saved for your retirement for years. Now that your retirement is approaching, how will you convert your plan savings into a regular income stream to help pay your bills? Most Americans will receive Social Security, a source of regular, guaranteed income. Some will have pensions; still others may receive income from work in the early years of retirement. Here we ll focus on creating a withdrawal plan from your retirement savings to provide you with a steady stream of income intended to last for decades. And for those who want additional guaranteed income, we ll also discuss important things to consider if you want to spend a portion of your savings on an annuity. Retirement savings > 1

4 Set up a systematic withdrawal plan Numerous studies suggest that if you follow a disciplined, conservative withdrawal plan, your savings have a good chance of lasting 30 years. To get started, withdraw no more than 4% of your retirement savings in the first year of retirement. You can transfer the money to a money market fund or checking account to help pay your bills. Many people feel they have earned a splurge when they retire. But if you spend too freely early in retirement, chances are greater that you will run out of money prematurely. After the first year you might choose to increase your annual withdrawals from savings by the rate of inflation. That way your withdrawals spending power could keep up with rising prices. On the other hand, if the market falls, you could skip inflation adjustments some years or even reduce your withdrawal amount. Retirees who undertake a systematic withdrawal plan like this should consider keeping their remaining savings in a diversified mix of investments, including a significant commitment to stocks. Stocks do have sharp price swings. But they also have shown greater growth potential than bonds or short-term reserves, which may help to sustain your savings over a lengthy retirement. If your employer s retirement plan does not allow systematic withdrawals, or if it has a fixed distribution period (such as 10 or 20 years), consider rolling over your plan savings to an IRA from which you can take withdrawals over a longer period. Please keep in mind that all investing is subject to risk. Investments in bond funds are subject to interest rate, credit, and inflation risk. For information about rolling over to a Vanguard IRA, visit vanguard.com/rollover. 2 < Retirement income

5 C A S E S T U D Y : Jim and Barbara adopt a systematic withdrawal plan Jim, an engineer, is retiring at age 66; his wife, Barbara, a teacher, is 65. Jim has $200,000 in a 401(k) plan invested equally between stocks and bonds. Barbara has a pension that pays $950 a month. Jim will receive $1,900 a month in Social Security retirement benefits. Barbara will receive $700 a month in Social Security retirement benefits. Barbara will earn $450 a month from her part-time teaching position. Because Jim and Barbara will have lifetime income from their Social Security benefits and her pension, they decide to keep Jim s savings in his 401(k) plan. This will provide them with some income, plus the flexibility to meet financial emergencies. When he retires, Jim withdraws 4% of his 401(k) balance, or $8,000, and deposits it into a money market fund. From there, he arranges automatic monthly transfers of $667 to his checking account. When the money is combined with their Social Security and Barbara s pension and teaching income, they will have $4,667 a month. As the years go by, Jim increases his yearly withdrawal by the rate of inflation. He remembers to rebalance his account every year to maintain its diversification. He also checks to be sure that his annual withdrawals satisfy his required minimum distributions, which begin after he reaches age 70½. If he adheres to this disciplined withdrawal strategy, Jim s 401(k) plan balance could provide a steady stream of income for more than 30 years. Of course, this hypothetical example does not represent the return on any particular investment. Jim takes systematic withdrawals $250,000 $200,000 Account balance $150,000 $100,000 $50,000 Withdrawals $0 5 years 10 years 15 years 20 years 25 years 30 years Account balance Withdrawals Assumptions: $200,000 initial balance, 5% average annual after-tax return, 4% first-year withdrawal, 2.5% annual inflation rate.

6 Do you want additional guaranteed income? A systematic withdrawal plan gives you plenty of flexibility. You maintain control over your investment strategy and have complete access to your money. It s important to realize that there are risks as well. If the market drops sharply early in your retirement, you may have to reduce your withdrawals to make your money last. If the downturn is severe and sustained, your money could run out early even if you reduce your withdrawals. For many, Social Security provides a guaranteed floor of support, and withdrawals from savings add spending flexibility. But if you re still worried about running out of money, you can consider using a portion of your retirement savings to purchase an annuity. An annuity is an insurance contract. In return for an up-front payment the premium the insurance company sends you regular, guaranteed income payments. This income can last for as long as you live, for as long as you or your spouse lives, or for a specific number of years.* Here are some of the most common annuity options: Single premium annuities are purchased with a single payment, typically at retirement. Immediate-income annuities begin to pay regular cash benefits right away. Single life annuities could provide benefits for as long as you live. Joint-and-survivor means that payments continue over the lifetimes of you and another person, such as your spouse. Fixed period means guaranteed payments for a specified number of years. If you die during that period, remaining payments go to your beneficiaries. *Product guarantees are subject to the claims-paying ability of the issuing insurance company. 4 < Retirement income

7 Important considerations when considering an annuity When shopping for an income annuity, you should seek a highly rated insurance company, which means that it is considered financially strong enough to honor its obligations. You may also want to purchase a policy with an inflation rider to preserve your spending power over a lengthy retirement. Insurance companies calculate annuity payments based on average life expectancies. The longer you expect to live, the more economic sense an annuity purchase may make. However, an income annuity purchase is typically irrevocable, so you do give up flexibility in return for guaranteed payments. What you re buying is a stream of regular income, but it s not generally an asset that you can pass along to heirs or cash in for emergencies. Consider a two-pronged approach 1. If you want more regular income than Social Security or a pension will provide, consider using a portion of your retirement savings to purchase an annuity. There s no hard-and-fast rule for retirees about how much of their savings they should annuitize, though 30% is a reasonable limit. Keep in mind that you lose access to whatever money you spend on an annuity and thereby lose some flexibility to respond to emergencies. 2. Then, you could draw income from your remaining savings. Your savings may stretch over a lengthy retirement if you take small annual withdrawals starting with 4%. Finally, an annuity is not a feature of your plan. You would have to roll over funds to purchase it outside your plan. If you re thinking of purchasing an income annuity, consider Vanguard Annuity Access, powered by the Income Solutions platform. In just a few minutes, you ll get customized online quotes from several highly rated insurance companies, which you can access at vanguard.com/income. Retirement income > 5

8 Vanguard can help The decisions you make about your retirement savings are important. Take your time as you make up your mind about what course to follow. Vanguard can answer your questions about retirement income and offers a wide array of investment and planning services that can help you as you transition from work to retirement. Retirement can be a wise time to engage the services of a financial planning professional to make the most of your choices. You can learn more about generating income during retirement at vanguard.com/retirementpaycheck. Or you can speak with a Vanguard Participant Services associate at Monday through Friday from 8:30 a.m. to 9 p.m., Eastern time. You can learn more about generating income during retirement at vanguard.com/retirementpaycheck. A money market mutual fund investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. All investing is subject to risk. Vanguard offers annuities through nonaffiliated companies. Connect with Vanguard vanguard.com/retirementpaycheck > Participant Education P.O. Box 2900 Valley Forge, PA The Vanguard Group, Inc. All rights reserved. BBBBCFMH