Retirement Income Planning: How to Create Guaranteed Income

Financial professionals generally suggest that retirees may need approximately 70-80% of their pre-retirement income to maintain their standard of living in retirement.^[1] For someone earning $100,000 per year before retirement, that translates to roughly $70,000 to $80,000 per year in retirement income.

Social Security is the foundation of most retirement income plans, but it was designed to replace only about 40% of pre-retirement earnings for average workers, according to the Social Security Administration.^[2] This means there is often a significant gap between what Social Security provides and what you actually need.

Identifying this gap is the first step in building a retirement income plan. The gap must be filled by some combination of personal savings, pensions (if available), annuity income, part-time work, or other sources.

One of the most impactful decisions you can make is when to begin claiming Social Security benefits. You can start as early as age 62, but your benefit will be permanently reduced. If you wait until age 70, your benefit will be significantly higher than your full retirement age amount due to delayed retirement credits.^[3]

For someone born in 1960 or later, the full retirement age is 67. Claiming at 62 would reduce the benefit to about 70% of the full amount, while waiting until 70 would increase it to about 124% of the full amount.^[4]

The right claiming strategy depends on your health, other income sources, marital status, and overall financial plan. For married couples, coordinating claiming strategies can maximize the total household benefit over both lifetimes.

Annuities are one of the few financial products that can provide guaranteed income for life. This makes them a useful tool for filling the gap between Social Security and your total income needs.

There are several ways annuities can provide retirement income. An income annuity (SPIA) converts a lump sum into immediate monthly payments that last for life. A deferred income annuity (DIA) allows you to purchase future income at a lower cost by delaying the start of payments. A fixed indexed annuity with an income rider provides a guaranteed withdrawal benefit that grows at a set rate during the deferral period.

According to the Employee Benefit Research Institute, retirees with guaranteed income sources beyond Social Security report significantly higher levels of confidence in their financial security.^[5]

The amount of guaranteed income an annuity provides depends on several factors, including your age, the amount of premium, the type of annuity, current interest rates, and the insurance company. A qualified advisor can provide personalized illustrations based on your specific situation.

A comprehensive retirement income plan should account for several key factors beyond just replacing your paycheck.

Taxes: Different income sources are taxed differently. Social Security may be partially taxable, traditional IRA and 401(k) withdrawals are fully taxable as ordinary income, Roth withdrawals are generally tax-free, and annuity payments have varying tax treatment depending on how the annuity was funded.

Inflation: The purchasing power of a fixed income stream decreases over time as prices rise. Your plan should account for inflation by including some growth-oriented assets or income sources with cost-of-living adjustments.

Healthcare: Healthcare costs tend to increase with age and can be one of the largest expenses in retirement. Medicare does not cover everything, and supplemental insurance, prescription drugs, and potential long-term care needs should all be factored into your plan.

Longevity: Planning for a long life is essential. A retirement that lasts 30 years or more requires a different strategy than one that lasts 15 years. Guaranteed lifetime income from annuities can help address longevity risk.