Turning retirement savings into income that lasts

For thirty or forty years the question is how much you're putting in. Then one day the question inverts: how much can you safely take out, for how long, without knowing how long you'll live or what markets will do along the way. Most people arrive at that transition with no framework for it, because almost all financial media is about accumulation.

Sequence risk: why timing matters more than average returns

Two retirees can experience identical average returns over twenty years and end up in very different places, purely because of the order those returns arrived in. Withdrawing from a portfolio during a downturn locks in losses — you're selling more shares to produce the same dollar of income, and there are fewer left to recover when markets turn. A bad first few years of retirement does disproportionate damage compared with the same years arriving later.

This is the specific risk that keeps people up at night without their being able to name it. It's also the reason the standard advice to "just stay invested" is less useful once you're drawing income rather than adding to the pile.

The income floor

A useful framework: separate your spending into what you must cover and what you'd like to cover.

Essential spending is housing, food, utilities, insurance, healthcare, transportation, property taxes. This continues whether or not markets cooperate. Discretionary spending is travel, gifts to grandchildren, the boat, the second home — real, meaningful, and postponable in a bad year.

The goal is to cover essential spending with income that doesn't depend on market performance, then let discretionary spending draw from assets that fluctuate. When the floor is covered, a bad market year becomes an inconvenience rather than a crisis, and — this is the underrated part — you're far less likely to panic and sell at the wrong moment.

Sources for that floor include Social Security, any pension, and guaranteed income from an annuity contract. Which mix makes sense depends on the size of the gap between your guaranteed income and your essential spending.

Social Security timing is a bigger decision than most annuity choices

Claiming age materially changes your lifetime benefit. Claiming before full retirement age permanently reduces the monthly amount; delaying past full retirement age increases it up to age 70. For a married couple, the higher earner's claiming decision also affects the survivor benefit the surviving spouse will receive for the rest of their life — which makes it a joint decision, not an individual one.

There are legitimate reasons to claim early: health, immediate need, or wanting to stop working. But it should be a decision, not a default. Before we discuss any insurance product with a client near retirement, we walk through the claiming decision, because getting it wrong is often more expensive than any product choice on the table.

Where annuities fit — and where they don't

An annuity is a contract with an insurance company. In exchange for your money, the company makes a defined set of promises. That can be a stated interest rate for a period, or index-linked crediting with a floor, or a guaranteed stream of payments for life.

Where they're useful: filling a gap between guaranteed income and essential spending; providing income that continues even if the account value is exhausted; and giving a risk-averse retiree the confidence to leave the rest of their portfolio invested rather than fleeing to cash.

Where they're not: for money you may need in the next several years. Deferred annuities carry surrender periods — commonly five to ten years, sometimes longer — during which withdrawals above a stated free amount incur charges, and in some contracts a market value adjustment. That single feature disqualifies annuities for emergency reserves and short-horizon money, and any agent who glosses over it is doing you a disservice.

They also aren't a replacement for an entire plan. An annuity is a component. The right amount is usually the amount that closes your income gap, not the largest amount you could put in.

The questions to work through

• What does your essential monthly spending actually total, including healthcare and property taxes?
• What guaranteed income will you have — Social Security, pension — and when does each start?
• What's the gap between those two numbers?
• How many months of expenses do you want liquid and untouchable?
• What are you hoping to leave behind, and to whom?
• What would you do if your portfolio dropped 25% in your second year of retirement?

Those six answers drive nearly every recommendation worth making. If someone proposes a product before asking them, they're selling rather than planning.

Start with the conversation

We'll walk through this framework with you at no cost, in English or Spanish, and tell you plainly if the honest answer is that you don't need to buy anything. Read more about annuities and retirement income or schedule a consultation.

Elavere Life & Retirement and its producers do not provide tax, legal, or investment advisory services. Information here is general and educational. Consult a qualified tax advisor, attorney, or investment professional regarding your circumstances.