October 19, 2018
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For retirement, income and savings matter

By: Ken Weise
June 15, 2018

A recent poll of pre-retirees suggests that truth risks are being ignored. Steady income or a lump sum? 

Last year, financial services firm TIAA asked working Americans: if you could choose between a lump sum of $500,000 or a monthly income of $2,700 at retirement, which choice would you make?

62 percent said that they would take the $2,700 per month. Figuring on a 20-year retirement for today’s 65-year-olds, $2,700 per month comes to $648,000 by age 85. So, why did nearly 40 percent of the survey respondents pick the lump sum over the stable monthly income? Maybe the instant gratification psychology common to lottery winners played a part. Maybe they ran some numbers and figured that the $500,000 lump sum would grow to exceed $648,000 in 20 years if invested – but there is certainly no guarantee of that. They may have taken inflation into account and deduced that $648,000 in retirement income would purchase less across the next 20 years than it currently does. Perhaps they felt their retirements would last less than 20 years, as was the case with many of their parents, making the lump sum a “better deal.”

The state of your accumulated retirement savings matters, yes – but retirement is when you start to convert those savings to fund your everyday life. Could you retire with income equivalent to 80 percent of your final salary?

If you have saved and invested consistently that objective may be achievable.

Social Security replaces about 40 percent income for the average wage earner. (With higher income levels, % may be less.) So where will you get the rest of your retirement income? It could come from as many as five sources.

• Systematic withdrawals from retirement savings and investment accounts. You may start taking distributions from these accounts at an initial withdrawal rate of 4 percent (or less). If these accounts are large, the income could even match or exceed your Social Security benefits.

• Private income contracts. Some retirees opt for these.

• Pensions. The health of some pension funds notwithstanding. •Your home. Selling an expensive residence and buying a cheaper one can free up equity and reduce future expenses.

• Work. Part-time work also lessens the pressure to draw down balances in your retirement and investment accounts. One recent analysis from the National Bureau of Economic Research concluded that by delaying your retirement even three to six months, you could give yourself the potential to raise your standard of living in retirement as much as you would if you save 1 percent more of your pay over 30 years. Remember that earning too much in retirement can impact your Social Security benefits. Part of them can be taxed if your “provisional income” surpasses a certain threshold. Social Security calculates your provisional income with the following formula: provisional income equals your modified adjusted gross income plus 50 percent of your yearly Social Security benefits plus 100 percent of tax-exempt interest that your investments generate. Talk to a financial professional about that matter before you retire. Ken Weise, an LPL Financial Advisor, provided this article. He can be reached at 707-584-6690. Securities offered through LPL Financial.