Build Lifetime Retirement Paychecks

This strategy involves building regular monthly retirement paychecks that last the rest of your life, no matter how long you live. Once these are in place, if you limit your spending to the total amount of your monthly retirement paychecks, you shouldn’t have to worry about running out of money.

Here are four ways you can build lifetime retirement paychecks:

• Buy an annuity from an insurance company that guarantees a monthly, lifetime retirement income. While there are many varieties of annuities, the most straightforward—and often least-expensive—annuity is a single premium immediate annuity, aka SPIA. It works like a personal pension: You give the insurance company a lump sum of money, and they guarantee to pay you a fixed monthly check for the rest of your life. If you’re married, you can also include your spouse in this plan with a joint and survivor annuity. And if you’re worried about inflation, you can pay extra for a fixed annual increase in your paycheck, such as 2%, 3%, or 4% per year.
• Invest your savings and make systematic monthly withdrawals that, by design, will prevent you from running out of money over your lifetime. The best way to make systematic withdrawal payments last the rest of your life is to adjust your paycheck each year to reflect investment gains or losses you’ve experienced to date. You can do this by choosing a percentage of your assets at the beginning of each year (4% for example), as the annual amount of your withdrawals. Then divide that annual amount by 12 to determine your monthly retirement paycheck. Another viable method is to use the methodology of the IRS required minimum distribution (RMD).
• If you have substantial home equity and don’t plan to move during your retirement, take out a reverse mortgage that delivers a monthly paycheck. If structured properly, these “tenure” payments will be paid to you for the rest of your life.
• Build a bond ladder that delivers predictable interest and principal repayments each year for a specified period. Choose the period with a high likelihood of lasting longer than you’ll live. For example, current retirees could build a bond ladder that would last until age 100. Of course, there could be a few retirees who make it to age 100 and beyond, so if you think that’s a possibility, pick a longer period or use one of the three other methods described above.

Preserve Your Principal

Another way to prevent running out of money over your lifetime is to invest your savings and spend just the interest and dividends that you earn each year. Keep the principal intact for that proverbial “rainy day” later in life when you might incur high expenses for medical bills or long-term care. If you don’t end up spending the principal over your lifetime, it can serve as a legacy for your family or charities.

Delay Drawing Down Your Savings

You can strategically delay drawing down your retirement savings to allow them to continue to grow and to shorten the period over which you’ll withdraw your savings. When you eventually start drawing down your savings, you can withdraw a higher retirement paycheck. Pre-retirees can help accomplish this goal by delaying their retirement date. Retirees can do this by working part time for a while and spending their work earnings on living expenses.

Maintain An Emergency Reserve

Set aside some savings that aren’t generating regular retirement paychecks to help pay for unexpected living expenses, such as emergency home or auto repairs. Otherwise, if you dip into your principal to pay for emergencies, you run the risk of reducing future retirement paychecks.