If you’re like most Americans, your focus for retirement is to build a sizable investment portfolio, do your best to maximize the returns from that portfolio, and then carefully withdraw from it to ensure it lasts your lifetime — even though you don’t know how long that will be.
All of this can create a lot of uncertainty in retirement. If you spend too much early on, you risk running out of savings. If you pinch pennies to preserve your nest egg, you risk not enjoying your retirement as much as you could.
This could be why studies have shown that people spend more and are happier in retirement when they have a fixed income stream that is guaranteed to last their lifetime. To get this, you can transfer your longevity risk to a company, government, or insurance company in the form of a pension, Social Security, or annuity.
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Knowing this type of income can make you happier, how can you maximize how much of it you get in retirement?
The benefits of defined benefits
One way to get this income is to work for an employer that provides a defined benefit (DB) pension plan. A DB plan is one where your employer guarantees lifelong regular payments based on your salary and how long you worked for the employer.
But DB plans have become much less common over the years. As of March 2023, only 10% of non-unionized private-sector workers had access to a defined benefit pension, according to the U.S. Bureau of Labor Statistics. They’re most commonly offered in unionized jobs and the public sector, including the military, although you can also find them in some skilled trades and in nursing.
The security of Social Security
Although DB plans may be hard to come by, you’ll likely get Social Security benefits. For many, they won’t be enough to be a sole source of income, but they have the benefit of being a known, regular payment. They will also last your lifetime, and your dependents may even be able to collect survivor benefits when you pass away. You’re eligible to start collecting Social Security benefits at 62, but the longer you wait — up to age 70 — the more you’ll receive each month.
The amount you are paid is based on your 35 best-earning years, so you may be able to increase it by working longer to gain more high-paying years. You can also work after you’ve started collecting benefits, and your earnings during those years could potentially be used to calculate your future benefits.
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You can buy happiness
A third way to get this type of income is by purchasing an annuity. Annuities are contracts with insurance companies that, in exchange for a lump sum or series of installments, will issue you regular payments for a set time or for the rest of your life.
For retirement, you’ll probably want to buy a lifetime annuity, which will continue paying you for as long as you live. You may also be able to enter a contract that will continue to pay a beneficiary after you pass away, until the contract value has been paid out.
There are three main types of annuities: A fixed annuity pays a regular, fixed amount set in the contract; a variable annuity pays an amount based on the performance of underlying investments; and an indexed annuity pays a base amount with the potential for upside based on the performance of an underlying index such as the S&P 500.
While fixed and indexed annuities have lower base payments, they are less risky than a variable annuity, and may provide payments that more closely resemble those of a DB pension or Social Security. If it’s happiness you’re after in retirement, then you may want to consider how you can set yourself up with fixed, lifetime payments.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
