Guaranteed Income: How Not to Need a McJob in Retirement

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80 Year Old Worker at McDonalds Restaurant
Jim West/Alamy
Last week, we talked about investing, the second circle of wealth in my series of "Six Absolute Necessities for Acquiring Long-Term Wealth." The third is guaranteed income. When I study people with successful retirements, filled with abundance and options, almost all have things in common:
  • They carry very little, if any, personal debt.
  • They have stable, secure income from multiple sources that they can set their watch by every month
  • Starting about 10 years before they retire, they begin shifting their assets from riskier investments to low- or no-risk income assets.
A mortgage is generally the biggest debt most of us have. Many argue that you should never pay off your house because the equity you put into it is tied up and not making you money. They might recommend borrowing as much as you can now because interest rates are low.

I say you can have the best of both worlds. First, pay off your mortgage before you retire. By adding small amounts directed to your principle every month, you will take months, even years off your payoff date. When your house is paid off, get the biggest equity line of credit you can. This way, if you see an attractive investment opportunity, you can put your equity to use, and if you don't, you have removed the pressure of a big mortgage payment in retirement.

If you can pay off your mortgage while you are working, why not now shift that payment over to a solid savings or income product? This could work out to tens of thousands of extra dollars producing monthly income for when you retire.

An abundant retirement is about strong positive cash flow that you can count on for years to come. Do you have any idea how much money you need to retire every month? Do you know where you can get that income from? Do you have enough money for home health care or long-term care? Are you protected from big market downturns during your retirement years? How much will inflation eat into that monthly income needed?

Can You Answer These Questions?

All these questions must be part of an income plan. We calculate these for clients all over the country. First, know how much income you and your spouse will receive from Social Security when you retire. You can get an estimate from the Social Security Administration. If you believe that number is at risk because of issues with Social Security, you better start putting more away and growing it safely.

If you need $5,000 per month to retire and the Social Security for you and your spouse is only $3,500, then you have a $1,500 shortfall. Do you have a pension? How much will that be when you begin to draw it? Do you have a 401(k) or Individual Retirement Account? How long could that account last if you need to draw $1,500 a month -- $18,000 in a year? Will you have to pay taxes on what you take out? If you have a 401(k) or traditional IRA, the answer is yes. If you lose 50 percent of your capital to a bear market, how long will you be able to get $18,000 per year?

As you get to be in what we call the "retirement danger zone," which is 10 years before your projected retirement, you need to start shifting assets away from market risk and over to guaranteed products. A solid fixed indexed annuity with a long-term income rider might be a very good call. I wrote an article about the different types of annuities and how to purchase one that fits your needs.

A lifetime income rider (state and product variations exist) will guarantee that you have a certain amount of income (depending on how much you have in your annuity and at what age you start withdrawing) for you and your spouse's life. If you live to be very old, your normal retirement funds might run out, but a lifetime income rider guarantees that income stream regardless of what happens to the underlying cash in the account. Also if you have five to 10 years, you have time for that income rider to grow. Many income riders offer 6 percent and more guaranteed growth every year.

When you purchase a $200,000 annuity, many companies might offer a 10 percent bonus on your initial purchase price so your starting amount would be $220,000. When you add compound growth at 6 percent over 10 years, your income rider would top $400,000. Then you would start to draw your lifetime income at 6 percent of the $400,000, giving you $24,000 a year income for you and your spouse's life. Presto! You have filled your income gap. If you have the resources to purchase another annuity, you might get one with a cost of living clause to hedge against inflation.

John Jamieson is the best-selling author of "The Perpetual Wealth System." Check out this week's featured video.

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28 Comments

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vlady1000

I set 3 goals to reach, and a priority. before retiring 1) The most important one by far- To have a cash flow streams producing at least 2X what I should need for retirement without touching any principle and assuming zero SS, and 50% of these streams to be inflation protected income. 2) Less than a $xxxx of GOOD debt (debt that actually makes you money), and zero bad debt. 3) $xxxx dollars of liquid and $xxx of semi liquid assets. Forget that "what is your number", no all that important, unless you plan on dying on schedule, and with nothing.

April 24 2014 at 10:35 PM Report abuse rate up rate down Reply
drmike15

How many Americans can afford a $200,000 annuity? From what I know of present individual and family debt they can barely afford to pay the minimum on their credit cards. These articles have an air of unreality to them, as if this were the 1945-1980 era when the US dominated the world economy, the Middle Class was large and prosperous, and one could attend a state college or university for free or close to free.

April 22 2014 at 3:07 PM Report abuse rate up rate down Reply
Catherine Lin

Americans just don't know how to plan for retirement. Here's what everyone SHOULD do:

PAY OFF YOUR HOUSE BEFORE YOU RETIRE!!

My taxes and insurance per month are less than a 1 bedroom apartment and you have to live somewhere

PAY OFF ANY OTHER DEBT AND THEN DON'T GET ANYMORE!

Maybe a car payment but that should be it.

GET GOOD LIFE INSURANCE!

You can get pretty solid life insurance for $30/month (from Life Ant) even when ur at or near retirement age.

FRONT LOAD YOUR HOUSE MAINTAINENCE!

If you know you need new windows, roof, furnace, etc. Get them done while you still have good cash flow.

LEARN ABOUT THE SERVICES AND DISCOUNTS THAT ARE AVAILABLE TO SENIORS IN YOUR AREA

Most cities have a senior center of some sort and can help with what is available to retired people

MAKE SURE YOU HAVE A PLAN TO FILL YOUR TIME.

Part time work, grandchildren, volunteerism, social clubs, hobbies, sports, etc to fill your time with meaningful activity that is free or inexpensive to help maintain yourself physically and emotionally

April 15 2014 at 10:16 PM Report abuse rate up rate down Reply
2 replies to Catherine Lin's comment
d.barack

Don't tell people what to do.

April 16 2014 at 2:57 AM Report abuse rate up rate down Reply
drmike15

That's reasonable advice.

April 22 2014 at 2:58 PM Report abuse rate up rate down Reply
albert

When a company like Mass Mutual Life Insurance, has an agent that forged my signature for loan requests from "Endowment Policies" for cash value and the company issued checks to the agent bt the name of Harold L. Whitney. who had his license revoked in Jefferson City, Missouri, for stealing. the agent had my social security number, my age, my date of birth. and I don't know what else he had, and of course my signature.I feel Mass Mutual should be liable for the forgery.
Albert Kandel
564 Sarah Lane, Apt. 305
Creve Couer, Mo. 63141

April 15 2014 at 11:22 AM Report abuse +1 rate up rate down Reply
alfredschrader

Paying off your house is smartest thing you could do. If you don't have any bills, you don't a large income.

April 15 2014 at 5:09 AM Report abuse rate up rate down Reply
Stephen

Biggest problem with retirement and pensions...is the worry that by the time you retire, your pension and related benefits will be diminished. The same worry exists after you retire... as quite often pensions and promised benefits are reduced. If you get what you are promised, you are one lucky retiree!

April 14 2014 at 11:15 PM Report abuse +2 rate up rate down Reply
j79xjames

The number one mistake is to not start planning and saving/investing early in life. You have to be be consistent (save with every paycheck), take advantage of any employer matching plan, max out contributions when possible, eliminate debt, avoid risks with your nest egg and plan for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.). There is a great deal of information about retirement available on the web. I use several sites including Dividenedchannel, Valueforum and the site Retirement And Good Living which provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

April 14 2014 at 6:23 PM Report abuse +1 rate up rate down Reply
Dave

I have 3 major issues with this article. First, they author does does not address the question as to what happens when one spouse dies. Can the other spouse have a good life or even survive without the lose of income from the deceased spouses Social Security or pension? Married couples must give lots of thought to this issue and the failure to do this is the most overlooked retirement issue of retirees.

Secondly the author claims that if you have $3500 in Social Security and need another $1500 from other sources that this $1500 would be taxable. Not necessarily and in fact probably not. Social Security is not treated has taxable income if a couples annual income + 1/2 of Social Security is less than $34,000. In this case $18,000 (1500 x 12) plus 1/2( 3500 x 12) would be $ 39000 which is only $5,000 over the $34,000 limit. So that couple taxable income would be $18,000 + $5,000 or $23,000. But couples get a $14,000 standard deduction and each gets about $3,800 as individual exemption so that only $23,000 - 14,000 - 2x 3,800 or $1400 would be taxable. This would be in th 10% bracket so that the tax bill would only be $140 or hardly anything to worry about. BTW, many states do not tax SS, which is another great savings.

And lastly, the author overlooks inflation with annuities. That annuity paying out $1500 a month when you are 65 will only be worth about $1,000 when you are 75 given 10 years of 3% inflation eating away at your payout. Annuities should be considered when you are in your late 70s as there are not that many years of inflation left in your life. But if you depend on annuity income for your retirement when you are in your 60s, you will find yourself in deep doodoo when you are in your 80s and maybe even your 70s.

April 14 2014 at 6:03 PM Report abuse +2 rate up rate down Reply
Shithead

"I say you can have the best of both worlds. First, pay off principle (principal!) every month, "

John Jamieson: How can I have confidence in what you say, when you don't know what "principal" is? I am retired and like to read others' ideas on staying ahead, financially, but you lose me when someone who is paid to write about a subject makes an elementary school mistake in the use of a key word in economics.

April 14 2014 at 4:36 PM Report abuse +2 rate up rate down Reply
toosmart4u

On social security and medicare or soon to be, thank a democrat. If you want to end these 2 fine programs vote republican.

April 14 2014 at 3:29 PM Report abuse -3 rate up rate down Reply
3 replies to toosmart4u's comment