How to Create Reliable Retirement Income
How to Create Reliable Retirement Income
For decades, retirement planning is primarily about one thing: accumulation.
You work, save, invest, and allow your money time to grow. Market declines can be uncomfortable, but when retirement is still years away, you generally have time to wait for markets to recover.
Then retirement arrives, and the entire equation changes. You move from the accumulation phase to the distribution phase.
Instead of putting money into your portfolio every month, you're now taking money out of it to fund your lifestyle. That transition requires a different approach.
Accumulation and Distribution Are Different
During accumulation, your portfolio can be positioned primarily around long-term growth.
During distribution, you still need growth, but now you also need income, liquidity, and protection from having to sell investments at the wrong time.
Consider what happens when someone retires with their entire portfolio invested in the market.
The market falls 25%, but the retiree still needs $5,000 every month. Those withdrawals don't stop simply because the market is down. Selling investments during a significant decline means locking in losses and removing assets that otherwise could have participated in the eventual recovery. This is one of the reasons sequence-of-returns risk becomes so important during retirement.
A retirement income plan should be designed around this new reality.
Give Different Assets Different Jobs
Rather than expecting one portfolio to provide liquidity, income, protection, and growth simultaneously, retirement assets can be structured according to their purpose.
Cash and money-market assets can provide immediate liquidity and emergency reserves.
Fixed and fixed indexed annuities can provide protection from market losses, index-linked growth potential, and retirement income options.
Investment portfolios can remain focused on longer-term growth.
This creates distinct layers within the retirement strategy.
Where Annuities Fit
Annuities can be particularly valuable during the transition from accumulation to distribution because they can address one of retirement's biggest challenges:
How do I turn accumulated savings into income without unnecessarily exposing all of those savings to market risk?
Fixed and fixed indexed annuities can provide protection from direct market losses while still providing opportunities for interest accumulation.
With a fixed indexed annuity, interest can be linked to the performance of a market index, subject to the contract's caps, participation rates, spreads, crediting methods, and other terms.
If the index declines, the index-crediting strategy generally does not credit a negative return solely because of that decline.
That combination of protection and growth potential can make annuities an effective tool for assets that have moved from simply accumulating wealth to helping fund retirement.
Two Ways to Create Income From an Annuity
Another important advantage is flexibility in how an annuity can be incorporated into a distribution strategy.
Guaranteed Income Riders
Some annuities offer optional income riders designed to provide a contractual stream of lifetime withdrawals.
For someone who prioritizes knowing that a certain level of income will continue regardless of how long they live, an income rider can provide valuable certainty. This can essentially create another predictable retirement-income source alongside Social Security or a pension.
There are trade-offs. Income riders can have additional costs, and the annuity's accumulation features or index-crediting terms may differ from contracts designed primarily for accumulation.
That's why guaranteed income should be evaluated based on whether the retiree actually needs that guarantee.
A Systematic Distribution Strategy
A retiree doesn't necessarily need an income rider to use an annuity for retirement distributions.
Another approach is to use a fixed or fixed indexed annuity primarily for protection and accumulation and take planned withdrawals from the contract as part of the retirement-income strategy. Many contracts permit a certain amount of penalty-free withdrawals each year, subject to their specific terms. This approach can potentially provide greater flexibility and may allow the retiree to select an annuity with stronger accumulation potential rather than paying for an income guarantee they may not need.
The important distinction is that these withdrawals aren't the same as guaranteed lifetime income. The sustainability of a systematic withdrawal strategy depends on the contract's performance, withdrawal rate, account value, and other factors.
Both approaches can be useful. They simply solve different problems.
Annuities Can Allow the Investment Portfolio to Focus on Growth
This is where the pieces begin working together.
Suppose a retiree has sufficient cash for emergencies and near-term expenses and has allocated another portion of retirement savings to an annuity designed to provide protection and distributions.
The remaining investment portfolio no longer has to perform every job.
Instead of constantly asking:
“What investments do I need to sell this month to pay my bills?”
the portfolio can be managed with a longer time horizon.
During a significant market decline, income can potentially come from other parts of the retirement strategy rather than forcing the retiree to liquidate investments at depressed prices.
That gives the investment portfolio time to recover.
It may also allow the investment portion of the retirement strategy to remain more growth-oriented, because assets needed for shorter-term income and stability have been addressed elsewhere.
A Simple Retirement Income Framework
Think about retirement assets in three layers:
Liquidity
Cash, savings, money-market funds, and emergency reserves.Protection & Distribution
Fixed and fixed indexed annuities providing market-loss protection, index-linked growth potential, and either planned distributions or guaranteed-income options.Long-Term Growth
An investment portfolio positioned to participate more fully in long-term market growth.
The result isn't eliminating risk.
It's putting the right type of risk in the right place.
From Building Wealth to Using Wealth
The strategy that helped you accumulate wealth isn't necessarily the same strategy you should use to distribute it.
Retirement represents a fundamental transition:
Accumulation → Distribution
Your money now needs to provide income while continuing to support a retirement that could last decades.
Annuities can play an important role in that transition by providing protection from market losses, index-linked growth potential, and flexible approaches to creating retirement income.
Some retirees may benefit from the certainty of a guaranteed lifetime income rider. Others may prefer an accumulation-focused annuity combined with a planned distribution strategy.
Combined with adequate liquidity and a long-term investment portfolio, these tools can create a retirement strategy where today's income doesn't have to come at the expense of tomorrow's growth.
Build Your Retirement Income Strategy
At TrueView Insurance, we help retirees and those approaching retirement understand how to transition from accumulating assets to creating a sustainable retirement-income strategy.
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Fixed and fixed indexed annuities are insurance products. Guarantees, including guarantees associated with income riders, are subject to contract terms and the claims-paying ability of the issuing insurer. Income riders may involve additional costs and restrictions. Fixed indexed annuities do not directly invest in or participate in a market index. Withdrawals may be subject to surrender charges, contract limitations, and taxation.
