When you retire, having money saved is only part of the equation. You also need a plan for turning those savings into income you can count on.
The three retirement income sources I want you to understand are Social Security, pensions or annuities, and your personal retirement savings. Each plays a different role, and together they can help you balance lifetime income, access to your money, and future growth.
Let me walk you through how these three pillars work and show you an example of how I would bring them together.
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1. Social Security: The Foundation of Your Retirement Income
When I used to teach college classes about Social Security, one question came up again and again: When should I start taking my benefits?
You can claim as early as 62, wait until your full retirement age, or delay until 70 to receive your highest monthly retirement benefit. The right decision depends on when you want to retire, your income needs, and how long you might live.
Since it’s impossible to predict the best conditions for retirement in the future, we have to look at how Social Security fits into the rest of your plan.
Many of the retirees I meet who are interested in annuity income start Social Security between 62 and 65. They want to retire sooner, and that income helps make it possible.
Waiting gives you a larger monthly benefit, but you need another way to cover your expenses in the meantime. That could mean continuing to work or using other retirement income sources.
Social Security also provides cost-of-living adjustments, which can help as prices rise. However, after Medicare premiums and your regular expenses, your benefit may not cover everything you need.
That is why I look at Social Security as one pillar of retirement, rather than the entire plan.
What if your household expects a smaller benefit?
If you are self-employed and have kept your earnings subject to Social Security taxes low, your future benefit may be smaller than you expect. That makes planning for additional income especially important.
You also need to consider your spouse. In my family, my wife has been raising our five children, so her Social Security planning centers on benefits available through my earnings record rather than a separate benefit from her own career.
The question I want you to ask is simple: How much income will Social Security provide for our household, and how much more will we need?
2. Pensions and Annuities: Build Additional Lifetime Income
If you have an employer pension, you already have another potential source of lifetime income. For married couples, the payout options may also allow income to continue for a surviving spouse.
But many people are responsible for building that income themselves. An annuity can help you create a personal pension using a portion of your retirement savings.
I work with more than 70 insurance carriers, and the goal is to compare the contracts that fit your situation. Your age, your spouse’s age, when you want income to begin, and whether payments cover one or both lives all matter.
What is a hybrid pension?
In the video above, I discuss what is sometimes called a hybrid pension. In this example, that means a fixed indexed annuity with a lifetime income rider attached.
The annuity has an account value, while the income rider provides lifetime payments according to the contract’s terms. Those are related features, but they are not the same thing.
You are not directly investing in the stock market through a fixed indexed annuity. Its interest-crediting terms determine how it may benefit from the performance of a market index.
When I compare these contracts for retirement income, my priority is the lifetime payout. If your main goal is accumulation, I would evaluate different features and potentially different annuities.
💡 Pro Tip: Decide what job you want an annuity to do before comparing products. A contract selected for lifetime income should be evaluated differently from one selected primarily for growth.
👉 Want help comparing annuities for your retirement income needs? Visit johnstevenson.com to schedule a call with me.
3. Your 401(k), IRA, and Savings: Keep Money Available for Growth and Flexibility
The third pillar includes your 401(k), IRA, brokerage accounts, and cash savings. These assets give you flexibility and can provide money for future needs beyond your regular income.
If you are still working and your employer offers a retirement plan match, I strongly encourage you to contribute enough to receive that match. It is an opportunity to build your retirement savings with help from your employer.
Once you retire, you do not necessarily have to move all your savings into an annuity. In the example I discuss, the couple uses part of their retirement assets to create income and keeps the rest invested.
The money outside the annuity serves several purposes:
- Providing access to funds for emergencies and other expenses.
- Keeping a portion of the portfolio invested for potential growth.
- Preserving the option to purchase additional lifetime income later.
Future investment growth is not guaranteed. Still, keeping assets outside your annuity can give you flexibility as your needs change.
I do not want you relying on an annuity surrender to handle every unexpected expense. Your income plan should also leave room for accessible savings.
4. How the Three Retirement Income Sources Work Together
In the video above, I illustrate a married couple in Delaware with $1 million in retirement savings. One spouse is 62, and the other is two years younger.
They allocate $500,000 to an annuity within a traditional IRA and leave the other $500,000 invested. Their initial plan is to defer annuity income for five years, starting payments when they are 67 and 65.
One of the illustrations showed approximately $54,000 per year in joint lifetime income. That income was designed to continue for as long as either covered spouse remained alive, subject to the contract’s terms.
If their Social Security income were $40,000 annually, the combination would provide:
- Social Security: $40,000 per year.
- Annuity income: $54,000 per year.
- Combined annual income: $94,000 before taxes.
They would also retain the other $500,000 for investment growth and future needs. These are the figures from the video’s illustration, not a current quote or a payout available to everyone.
What happens if the annuity account value runs out?
In the illustration, ongoing withdrawals eventually depleted the account value. The timing depended partly on whether the annuity received index-linked interest credits.
However, the lifetime income benefit could continue after the account value reached zero, provided the contract’s requirements were followed. That is a key distinction between the remaining account balance and the lifetime income promise.
For the contract illustrated, the death benefit was tied to the remaining account value. You should not assume that your beneficiaries will receive the original premium after years of income payments.
Accessing the surrender value is another consideration. Surrender charges may apply, and taking money out beyond the permitted terms can reduce or end the lifetime income benefit.
What if they wait until age 70?
I also show how the comparison changes if the older spouse waits until 70 to begin income. Some contracts become more competitive with a longer deferral period.
In that scenario, one illustration showed approximately $71,000 in annual annuity income. Combined with an assumed $55,000 in Social Security income, that would total approximately $126,000 per year before taxes.
Those figures are specific examples, not a promise that delaying will produce the same result for you. The point is that your expected income start date can change which contract makes the most sense.
💡 Pro Tip: If you might retire at 67 but could wait until 70, compare both dates before choosing an annuity. The strongest option for a five-year deferral may differ from the strongest option for an eight-year deferral.
5. Build Your Plan Around the Income You Need
Here is how I bring these three pillars together: Social Security provides a foundation, a pension or annuity adds lifetime income, and your remaining savings provide flexibility and potential growth.
You may also decide to purchase additional income later if your investments grow and your needs change. That is an option to evaluate over time, rather than something you have to decide all at once.
The earlier you start comparing your choices, the more time you have to consider deferral periods and different retirement dates. Some annuity contracts provide meaningfully different payouts depending on how long you wait.
On my website, you can explore calculators for different annuity approaches, including immediate and deferred income annuities. The right choice depends on whether you are prioritizing income, access to your money, or accumulation.
When we meet, I can compare options across carriers, walk through the illustrations, and send you the PDFs and brochures. I earn compensation from selling annuities, but the decision is yours, and my role is to help you understand the choices.
Need help with finding the best annuity for your retirement?
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On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have