Saving for retirement is a problem but one with a fairly simple solution: Put money away and invest safely so that it can compound.
Once you hit retirement, however, the challenges begin. What retirees need is a solid weekly or monthly “paycheck” that doesn’t vary. They also need protection from inflation, or that money diminishes slowly but surely into a meaningless amount.
Prices surely will rise in the future, so you need both the solidity of fixed income and the inflation protection of stocks. How you get that mixture, however, is up to you.
One way people solve this problem is buying an annuity. Sold by insurance companies, annuities work like a pension plan, paying a steady amount of money monthly until your demise. People like them because they are simple and take the work out of investing.
The downside is the cost. Annuities come stuffed full of fees that more or less guarantee that a lot of your savings works for the insurance company, not for you. If you have a significantly sized portfolio and don’t mind fees, some types of annuities can make sense. Too often, however, they are simply a wealth drain.
Think about it: Where will the insurance company get the income to pay you? From the stock market, of course. They only way to ensure your income flow is permanent is to estimate your likely lifespan (which is what insurance companies do) and invest in a way that provides the contractually agreed income while reducing their risk of loss to zero.
What folks often forget is that they already own an annuity — called Social Security. Like an insurance company product or a pension, you get your government retirement benefits until death. It might not be a significant amount each month, but it’s not zero.
Building a paycheck
So, start from there. The first leg of the stool in your retirement paycheck will be your Social Security income.
The second leg, for many people, will be a part-time job. You might not keep that job for a long time, perhaps the first five or eight years of retirement, but a steady income to supplement government retirement benefits can be a huge help.
Why? Because every year you don’t spend down your retirement savings, it grows with the market. Owning a well-designed, balanced portfolio of stocks and bonds gives you an opportunity to double your nest egg in as little as 10 years. If you begin to spend it down, that money is no longer working for you.
The trick is to imagine how to live during that period just after you retire but before you need to rely on your investments 100% for income. A great retirement portfolio can achievement this goal at minimal cost and with little to no time and effort.