Covering Your Client’s Retirement: Estimate And Secure Income

How much money do you need to save for retirement? If you're trying to calculate a dollar amount, you're probably not looking at it the right way.

It's hard to know how long a certain sum will last because of so many unknowns. Two variables are future inflation rates and how much you'll earn on your money during retirement. And the biggest unknown is how long you (and your spouse, if you're married) will live.

So, instead of trying to calculate a lump sum, it's better to gauge how much monthly income you'll need, no matter how long you'll live. That approach reduces the number of unpredictable variables in your planning.

First, estimate your monthly expenses in retirement. Some rough guidelines say you'll need about 60% to 80% of your preretirement income.

However, you can get a more personalized number by adding up key monthly expenses, such as housing, food, utilities, insurance, transportation, and whatever other items you'll need. Try to estimate how these costs may change in the future.

Next, estimate your monthly retirement income from Social Security, pension(s) if you have any, savings and other sources if any.

A good quick online calculator is the Retirement Income Security Evaluation (RISE) Score. It takes about 10 minutes to fill in the numbers and complete.

If your monthly expenses exceed your expected income, you'll need to figure out ways to bring them into balance. Delaying Social Security payments, as we'll see below, is one way to boost retirement income. An annuity can also help.

Retirement income can be put roughly into three buckets:

Variable income

This is income generated by savings and investments. The amount will vary because you can expect to spend down your savings (including IRAs and 401(k) accounts) during retirement. Lower savings balances will produce less income. Additionally, returns and interest rates will vary in the future.

Guaranteed level lifetime income

Most traditional employer-provided pensions provide a set monthly benefit that's guaranteed for life but will never increase. These pensions may also pay a full or partial benefit to a surviving spouse.

Basic lifetime income annuities also usually pay an unchanging monthly amount. Income annuities are contracts sold by insurance companies. They convert your savings into a stream of income for a lifetime or a certain term. Income annuities can cover one person or both spouses.

Guaranteed lifetime income that increases

Social Security benefits are adjusted upward annually for inflation. That makes them uniquely valuable.

It's important to remember that if both spouses have substantial earnings over a lifetime, the death of one usually results in a significant drop in Social Security income.

Additionally, many lifetime income annuities offer an optional cost-of-living rider that ensures an increasing stream of income in the future. However, there is a cost, in that initial payments are lower than they would be with an annuity without the feature. If you live long enough, you'll come out ahead.

A way to delay taking Social Security and increase monthly benefits

If you can afford to wait until age 70 to start receiving benefits, you'll get higher payments. For example, you'd receive about 76% more a month by starting at age 70 than you would if you started at 62. Starting at age 70 gives you about 28% more a month than starting at 66½.

Delaying has another benefit: future inflation adjustments will be bigger, because your base benefit is larger.

The downside is that you forgo payments for several years. Delaying Social Security is a bet that you'll live a long life.

Many people can't afford to delay taking Social Security. An immediate income annuity offers one way to plug the income gap.

If you have sufficient savings, you could buy an eight-year immediate annuity at age 62. (This is also called a period certain annuity.) That income could allow you to delay starting Social Security for eight years when your Social Security benefits will be maximized.

You could also delay taking Social Security by, say, five years, from 65 to 70, or 63 to 68, or whatever period makes the most sense for you. The shorter the period you want to cover, the less money you'd need to deposit in an annuity to produce the same income.

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