Transforming your retirement assets into income
What does it take to turn dreams into reality?
Retirement is a time in life meant just for you and it can be anything you want it to be – especially if you plan for it. To live out the retirement you envision think about aligning how you want to live in retirement with providing yourself an income. You might decide to schedule the majority of your adventures for the early part of your retirement. If so, you may choose an income option that provides more funding up front.
Or, if you have people depending on you, an income option that helps you meet your financial obligations to them may be more appropriate.
There are a variety of ways to convert your retirement savings into retirement income and each type of investment has rules governing the ability to draw down your money and when. It is essential that before you reach retirement, you consider all of the types of savings one could have by making sure you have a plan is the best way to make sure you can keep the lifestyle you wish in retirement. So what do you need to know?
Variable annuities and mutual funds are intended as long-term investments for retirement purposes. It’s generally considered a good idea to reacquaint yourself with the possible fees and charges these investment vehicles may assess before withdrawing accumulated amounts. Variable annuities and mutual funds are subject to the ups and downs of the market.
How long will you need income?
The income option that is right for you will likely be based on how long you want your payments to last. Given today’s longer life expectancies, you may wish to plan for 20 to 30 years, or more, depending on how young you are when you retire.
Lump Sum Withdrawal
You can turn your retirement savings into immediate income by simply withdrawing the entire amount from the plan with a lump-sum withdrawal. Many people believe that taking a lump sum withdrawal means taking all of your money out at once. If your plan allows, you may also be able to take just a portion of your account balance in a lump sum and leave the rest to continue to experience tax-deferred growth potential.
However, you may want to consider your other options because the tax burden and possible penalties and fees could be significant.
If your plan allows for them, systematic withdrawals would allow you to take money periodically from a qualified retirement plan. You would select the payment period and the size of the withdrawals, either as a fixed dollar amount or a percentage of your account value. Systematic withdrawal plans can be changed or canceled at any time.
After you turn 70½, you could use systematic withdrawals to help comply with the IRS RMD (Required Minimum Distribution) rules.
With an annuity payout, your account balance would be rolled over for a guaranteed income paid at regular intervals over a specified period of time. Guarantees would be based on the claims-paying ability of the issuing company. You would select how long your payments will last, who will receive the payments and how.
- Lifetime annuity – This option pays you an income for as long as you live.
- Period certain only – Fixed payments are guaranteed over a certain “period” of time – for instance, 5, 10 or 20 years. Payments cease at the end of the period. If you die before the period ends, your beneficiary will continue to receive payments until the end of the period.
- Life and period certain – This option guarantees a fixed income over the longer of your lifetime or a “certain” period. Guarantees are based on the claims-paying ability of the issuing company. If you die before the period ends, payments continue to your beneficiary until the end of the period.
- Joint and Survivor – This option guarantees an income over the longer of your lifetime or that of a beneficiary. Guarantees are based on the claims-paying ability of the issuing company. The income varies based on your age, the age of your beneficiary and the survivorship option selected.
As you can see, there are many options to provide yourself an income and knowing the differences can help you as you think about retirement. To get more insight on these topics, read more about planning for a continual payout option or comparing your distribution options. Once you read these articles, consider contacting a financial professional to help with any questions and start planning your retirement income for tomorrow.