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With fewer employer pensions these days, some retirees are reluctant to cut their nest egg. However, older Americans can spend more freely with a guaranteed source of income like Social Security or a private pension.
That comes from a research paper examining retirement spending. The report compared retirees on lifelong incomes to those living on an investment portfolio.
The results suggest that retirees with guaranteed incomes may spend twice as much as those who draw wealth from their retirement assets.
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“People don’t like the idea of their nest egg getting smaller,” said report co-author Michael Finke, a certified financial planner and professor of wealth management at the American College of Financial Services.
In addition, reluctance to spend is common among those who have ample savings, even when they do not want to give wealth to their heirs, he said.
According to the Bureau of Labor Statistics, around 67% of workers in the private sector had access to retirement plans in 2020. However, many retirees find it difficult to spend their money after they leave the labor force.
While retirees tend to be happier with a clear savings strategy, 25% don’t have a plan, according to a BlackRock report.
“The whole purpose of the 401 (k) system is to encourage people to live better lives in retirement,” said Finke. “But we haven’t really developed a system that would allow them to do that when they retire.”
Although workers can benefit from plan pensions, less than 10% of company pensions offered this option in 2019, according to the Plan Sponsor Council of America.
Private pensions
Those concerned about the survival of the savings may consider buying a private retirement plan that offers monthly payments for life.
For example, let’s say a 65-year-old Tennessee woman expects to spend $ 50,000 a year. With $ 30,000 a year from Social Security, she may want a pension to cover the remaining $ 20,000.
If she wants income to start in five years, her premiums can start at approximately $ 274,000 and cover for life with no minimum payout or death benefit for heirs, according to Schwab’s Income Annuity Estimator.
However, financial experts say retirees should consider all of their options before buying an annuity.
It is a tough decision and cannot be made in isolation.
Anthony Watson
Founder and President of Thrive Retirement Specialists
“It can be extremely confusing for consumers to understand,” said Anthony Watson, CFP, founder and president of Thrive Retirement Specialists in Dearborn, Michigan. “They lack standardization and transparency.”
Retirees must assess their full financial situation before signing up, he said.
“It’s a tough decision and can’t be made in isolation,” said Watson. “All of these things go together.”
A retirement plan does not stagnate. Customers can adjust to the stock market and other life changes on a regular basis, he said.
“Often times, you can make customers feel much more comfortable spending these assets and feel more empowered to do so,” said Watson.
Social Security Delay
Another way to increase your guaranteed income is to defer social security. Those who wait until retirement age to move in can receive higher monthly payments for life, depending on their year of birth. Pensioners can claim higher benefits up to 70.
For example, let’s say someone was born in 1957 and is entitled to $ 1,000 a month. If they start at 62, they’ll get just $ 725, a 27.5% lifetime discount, according to the Social Security Administration.
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