The approach advocated here is to build a strong foundation under your retirement by using an annuity to provide income sufficient to meet your basic living expenses.
By focusing on devoting the minimum amount of savings to accomplish this objective, you should be able to determine precisely how much of your savings will remain to meet our other retirement objectives.
This remaining money can be allocated to other financial instruments to provide potential growth and the additional income you’ll want for the more enjoyable things during your retirement.
One possible benefit of taking this approach might be that you will have more confidence to spend some of your money on those enjoyable things, because you’ll know that your annuity, Social Security and other sources of protected income will be there to provide for your future expenses.
Follow the steps below to arrive at the amount of income needed for this purpose. Once you know the amount of your basic living expenses that’s not covered by things like Social Security, you should be able to easily obtain annuity quotes from different insurance companies showing how much money would need to be allocated to the annuity in order to provide that needed income.
Step #1 – Estimate your anticipated monthly living expenses during retirement.
The approach that you want to take with this step is to try to envision your life during retirement and list the expenses that will be required to maintain your lifestyle.
Next to each expense item you should place a check mark to indicate if this is an essential must have expense item as opposed to a want to have expense item.
The purpose of listing these expenses is not to create a budget that you will use to dictate how you spend your money. Instead, the goal here is to come up with a total estimated amount of essential monthly expenses.
Step #2 – Identify reliable and consistent income sources.
In this step, you list the amounts and sources of protected income you expect to have available at retirement to help pay for those essential must have living expenses that you calculated in step #1.
Protected income refers to income that is reliable, consistent and lifelong. And generally speaking, the types of income that meets this description are Social Security, employer-provided pension and income annuities. If you have other income sources that you believe are adequately protected, you can include them in the total, but the objective here should be to only include income that you are fairly certain you can count on regardless of future changes in the economy or financial markets. Rental income from property you own that has a long track record of being highly desirable and easy to keep rented might be an example of income you might want to include.
If you have an employer-provided pension but are not yet retired and don’t know the amount of your projected pension income, you should be able to obtain an estimate from the employee benefits department at your work.
You’ll also want to obtain a current benefit statement from the Social Security Administration. There are step-by-step instructions in the back of this book showing how you can easily do this online.
Step #3 – Obtain quotes from insurance companies.
After you calculate your total essential must have expenses in step #1, and subtract your total protected income you determined in step #2, you will arrive at the amount of additional protected income you would want to have provided by an annuity.
This will be your annuity income target.
Now that you know this amount the correct path is to look for insurance companies that require you to pay the least amount of money in order to generate the targeted income.
Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.