There comes a point in many a client’s financial plan that requires them to rely on the savings they’ve accu-
mulated to now support their income needs. This may be because of a retirement or that they’ve started
to scale back in their working hours. In any case there are a few sources of income most retirees rely on to
meet their income needs in retirement.
- 1 We are all familiar with Social Security Income, which is a government sponsored program that
generally allows people who’ve paid into the program and have enough eligible quarters of partic-
ipation to begin drawing a benefit. Some people may refer to Social Security as a source of Guar-
anteed Income, in-so-much-as its backed by the Government, more precisely, a trust fund that is
managed by the Treasury arm of the government. This is one such benefit that you cannot outlive,
and it carries no market risk.
- 2 A second income source for far fewer people is a pension. According to the Pension Rights Center,
only about one-third of Americans are retiring with a pension. For those unfamiliar with this type of
retirement income, it’s a retirement plan that typically has been funded by the retiree’s employer
over the course of their employment and has a certain guaranteed income payout stream for the
retiree’s life.
There are various nuances to the timing and selection of the payout but suffice to say it can be
counted as a source of guaranteed income. In addition, Pension Plans are generally backed against
loss by the PBGC, The Pension Benefit and Guarantee Corporation, which is federal agency
created by the Employee Retirement Income Security Act of 1974
(ERISA) to protect pension benefits in both single-employer and
multiemployer private sector pension plans.
What about 401(k)s, personal retirement savings or even
investment property income? No income or withdrawals from
these various savings and investment vehicles is guaranteed.
There are no insurance company or government backed entities
making sure that these instruments never run out of money.
- 3 The last notable source of guaranteed income comes in the form of income annuities, or in the
industry language, Deferred Income Annuity or Immediate Income Annuity. Do you want a
guaranteed income stream for the rest of your life to start in the future or do you need one now?
By putting some of your retirement savings into these financial products, you can have a steady,
guaranteed income stream for life, typically a return of principal at a higher rate that what one
could safely achieve under withdrawals in riskier market condition over the course of one’s lifetime.
Income annuities have a similar feel to Social Security or Pension Plans in that they have a guaran-
teed income selected at time of funding and based on the terms of the contract. They also typically
have a limited death benefit or limited continuation of income, again depending on what’s selected
at the time of contract. In addition, like Social Security and Pensions, they don’t typically offer any
means of withdrawing excess money or principal from what is already setup to automatically be
distributed as the stream of guaranteed income. For some, that might be a downside in that you
have little to no liquidity with this money, as control of the money has been given
up to the insurer in exchange for an income stream. Also,
depending on what type of money is used to fund one,
there are differing tax implications on the withdrawals.
What is backing these guaranteed income
contracts? Since these contracts are issued by
insurance companies, they are backed by the
financial strength of the insurance company that is
issuing them. This could be a company with really
high financial strength ratings with a strong surplus
and strong business lines supporting its growth, or
it could be a company with weak ratings and poor
financial health. So it pays to make sure the
guarantees you have supporting your retirement
dollars are backed by financially stable and sound
guarantors.
So, how many sources of guaranteed income do you have in your plans now or in the future? Should you
have any money earmarked for these types of vehicles? Is the income you have guaranteed enough or is
there too much left to market and other variable risks?
Bradley Ruh
Owner, Financial Adviser