You should look at your retirement savings as retirement income generators that will give you a monthly paycheck for the rest of your life. Then, spend no more than that amount. There are basically three ways to accomplish this:
- Invest your savings and spend only the earnings from them. Don’t touch the principle.
- Invest your savings and draw down the principle with caution so you don’t outlive your savings.
- Buy an annuity from an insurance company and live off that monthly benefit.
This might also protect your from inflation in addition to generating a lifetime of income no matter how long you live. That’s peace of mind everybody wants.
Here are a few variations of the aforementioned options:
Scenario one you can invest in a variety of mutual funds, individual stocks and bonds, rental real estate, etc. Under #2, you could invest your money on your own and withdraw what you need, or you could utilize a managed payout fund which does it all for you. Finally, with the third option, you could choose from several options which include a fixed dollar amount, one that’s adjusted for inflation or a variable option among others.
All options have pros and cons and here is how they typically generate income:
- RIG #1, interest and dividends, typically pays an annual income ranging from 2 percent to 3.5 percent of your savings, depending on the specific investments you select and the allocation between stocks, bonds, cash and real estate investments.
- RIG #2, systematic withdrawals, typically pays an annual income from 3.5 percent to 5 percent of your savings, depending on your investments and how worried you are about exhausting your savings before you die.
- RIG #3, immediate annuities, can range from 4 percent to 6.5 percent of your savings, depending on the type of annuity you buy and your age, sex and whether you continue income to a beneficiary after your death.