Three steps to building retirement income you can rely on

by Justus Morgan, CFP®

As we start a new year, it’s natural to think not just about the next 12 months but about your longer-term goals—like retirement. If retiring comfortably is one of your financial priorities, preparing in advance will help.

One of the most important pieces of any successful retirement plan is having a reliable stream of income that lasts as long as you do. Outliving your money is a common worry among retirees, but there are steps you can take to feel more confident.

Step 1: Gather Your Information

The first step is to get a clear picture of your potential income sources. Here’s how:

• Social Security: Visit ssa.gov to review your Social Security benefits.  If it’s your first time logging in, you’ll need to set up an account. Once inside, check your benefit estimates and confirm your earnings record. Gaps in your reported earnings could lower your benefit.
• Pensions: If your employer offers a pension, find out what your projected benefits look like at full retirement age (typically 65) and at the earliest age you can start collecting (often as early as 55). Understanding the difference can help you weigh the pros and cons of starting benefits early versus waiting.
• Annuities: If you’re considering an annuity for retirement income, a single premium immediate annuity (SPIA) might resemble a traditional pension. For example, a 65-year-old man could use $100,000 to buy an annual income of roughly $7,600 for life. Sites like Blueprint Income can provide quotes.

Step 2: Analyze Your Options

With your data in hand, it’s time to evaluate the best choices for your situation. Here are two strategies that can help:

• Run a Break-Even Analysis: This shows how long it takes for waiting to collect a benefit (like Social Security) to pay off. For instance, if you could start receiving $750/month now or $1,000/month by waiting five years, calculate the total you’d miss by waiting ($750 x 60 months = $45,000). Then divide that by the increase in monthly income ($250) to find the break-even point—in this case, 15 years. If you live past that, delaying could be worthwhile.
• Compare Pension vs. Annuity Options: Some pension plans let you take a lump sum instead of monthly payments. To decide which is better, get quotes for an annuity using the lump sum amount. If the annuity provides higher monthly income, it might be worth considering. Just keep in mind that annuities are subject to state insurance protections, while pensions may have federal guarantees through the Pension Benefit Guarantee Corporation (PBGC). The final decision regarding taking the lump sum versus the monthly income depends on a variety of factors beyond the scope of this article.

Step 3: Make a Plan and Take Action

Once you’ve crunched the numbers, it’s time to act. Here are some tips:

• Use the break-even analysis to weigh the trade-offs of starting benefits now versus later. Think about your life expectancy and whether you’ll need other resources while waiting.
• If you’re leaning toward an annuity, work with an advisor to roll over any pension lump sums tax-free into an IRA to fund the purchase.
• Consider the safety nets: Pensions covered by the PBGC offer protection if the plan runs out of money, while annuities have state-level guarantees. Be sure you understand the fine print for each option.

At the end of the day, the goal is simple: create a retirement income plan that gives you peace of mind and the freedom to enjoy life, knowing your financial foundation is secure. A robust retirement income plan will incorporate maximizing your current income while reducing the risk of outliving your assets.