Explaining Guaranteed & Non-Guaranteed Income
Your life’s work allows you to receive paychecks until you retire. How do you plan to receive paychecks for the rest of your life so you can stay retired?
There are many sources you may receive retirement income from, but most include the risk of running out of money before you run out of life.
Bonds are often used to create income, but if you are trying to live off the income of safe bonds, you are not going to get paid much as yields are 1-3%. High yield bonds, also know as “junk” bonds, may lose your principal and are generally considered too risky for retirement.
Certificates of Deposit can also create income; however today’s national average yield on a 5-year CD is 0.95%. The income this CD provides would not be very much.
Target Dated Mutual Funds offer no guarantees, place principal at risk, and often do not deliver the results you need. This is because they are not able to control what the markets do and are dependent on consistent market growth over time to create income.
Dividend Paying Stocks can be great until the dividends are reduced or stopped altogether. You have no control over the board of directors, which makes the decision. A stock’s ability to pay dividends is directly related to its profitability, which in turn is impacted by the economy. The repercussions of the 2008/2009 recession are still being dealt with today. Dividend paying stocks can be helpful but offer no guarantees.
Working during Retirement Years will provide income, but there are several issues to be addressed. Do you want to fully retire at some point? Would you like to stop working for a living at age 60, 65, 70? Will you be healthy enough to continue working? Will the economy offer you employment as you age and potentially become less employable? And finally the obvious, if you never quit working, then you will never retire.
Pensions are designed to deliver income during retirement but there are three challenges. First, are you entitled to one? Since the advent of the 401k, most are not eligible. Second, many are underfunded and will not be capable of delivering sufficient income in retirement. Third, most are dependent on stock market gains over time. Many pension fund managers are counting on an 8% return from the market and some need even higher returns than that. Bill Gross, CEO of PIMCO Bond Funds and manager of the world’s largest bond fund, believes that the stock market will yield a 4-5% return for many years to come. 1
Social Security was created to provide you with income for life. This income will last a lifetime because of our government’s ability to print money and raise taxes to keep the income coming. Most are well aware of Social Security. But, did you know that there is potential for you to maximize your payout on Social Security? You can learn more about this in our Social Security section of this website. Although Social Security was never intended to be our sole source of retirement funds, for many it represents 1/3 to 1/2 of their retirement income.
Fixed Indexed Annuities are a type of annuity that provide several attractive features. First, there is no market risk to your principal. Second, you can grow your principal, benefiting by a rising market, but never be hurt when it falls. Third, you can “turn on” income at any time, even as early as thirty days after you have purchased a Fixed Indexed Annuity. Options exist that allow you to fund the annuity with either IRA/401k pre-tax funds or with already taxed funds. Using an IRA or 401k to buy an annuity does not create a taxable event. Your funds will continue to grow tax-free until you start taking income.
Although there are many potential sources of income there are only two that are guaranteed for life, Social Security and annuities. And of the several types of annuities we recommend, Fixed Indexed Annuities have unparalleled versatility in providing protection, growth, and lifetime income for retirement.
1 William H. Gross; “Cult Figures”; http://pimco.com/EN/insights/pages/cult-figures.aspx; accessed 01/01/2013