 Finding Income in Retirement
by Gerald Townsend, Financial Editor
You’ve worked hard for many years and retirement is finally in sight, or perhaps it’s already in the rear-view mirror. The good news is that your retirement years may last a long time. According to the Society of Actuaries, for a 65-year old couple, there is an 85% chance that at least one of them will live beyond age 85.
That’s also the bad news, because once the paycheck stops, where will the money come from to pay for those golden years?
For most people, a pension is a relic from the past and social security is merely a contribution towards the monthly expenses, so they must rely upon their accumulated assets to supply the difference. However, moving from a focus on growing assets to conserving assets and generating income from those assets is a huge mental shift. Here are some of the tools and products to consider.
An “income annuity,” is a product offered by insurance companies that can provide a guaranteed income for your lifetime. That sounds pretty good, doesn’t it? Who wouldn’t want a guaranteed income for life? However, you need to understand what happens when you buy an income annuity. Basically, you give your money to the insurance company, and they, in turn, give you a promise – to pay a certain sum every month. Depending on the contract, you may or may not be able to undo the transaction, but regardless, getting out of an income annuity will cost you, so think carefully before entering into these contracts. Follow the adage of woodworkers and “measure twice and cut once.”
 What do these annuities pay?
You can get an estimate by going to
www.immediateannuities.com and entering some basic information. For example: for a 65 year old couple with $100,000 who want annuity payments for their lifetime, the average of 16 different companies was $581 per month (a “joint-life” annuity). However, this annuity stops once both spouses die. If they wanted an annuity that would pay for their lifetime, but would pay for at least 20 years, even if they both had died, the monthly payment drops to $537.
Annuities are often touted as a wonderful replacement for today’s non-existent pensions; however, given that you are surrendering your principal and that the annuity payment is often not much different than what you could accomplish on your own by investing in dividend stocks or bonds, I’ve never been a fan of annuities in most situations.
How about becoming a landlord? If you have a second home, consider renting it partially or fully. If you currently own non-income producing real estate, such as a vacant lot or acreage, consider utilizing a tax-deferred exchange to swap that property for other real estate that is generating rental income.
Another possibility for retirement income is a reverse mortgage on your home, but much like annuities, do your homework prior to jumping. Go to the Federal Trade Commission’s Web site at www.ftc.gov and read more about reverse mortgages.
A well-diversified portfolio of stocks and bonds, or mutual funds that invest in them, should be the cornerstone for most retirement portfolios.
While shorter-term or higher-quality bonds are yielding perhaps 5% - 6%, you can obtain higher yields by extending the maturity, lowering your quality standards, or venturing abroad.
When most people think of stocks, they just focus on growth, but equity investments can provide an increasing income (profitable companies raise their dividend payments) as well as growth of capital.
Some examples and recent dividend yields:
Windstream Corp (WIN) 6.8%; Bank of America (BAC) 4.4%; General Electric (GE) 3.1%; Progress Energy (PGN) 4.7%; and Health Care Property Investors (HCP) 5.4%.
You may not be drawing a paycheck in retirement, but you’ve still got work to do, tending to your portfolio.
Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.
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May 2007: Financial Planning for Elder Family Members
April 2007: Your Retirement Savings Scorecard
March 2007: The Three Questions: Part III
February 2007: Tax Changes and Your 2006 Return
January 2007: The Three Questions: Part II
January 2007: Economic and Market Outlook for 2007
December 2006: The Three Questions: Part I
November 2006: Estate Taxes: Where Are We Headed?
October 2006: The Basics of Long-Term Care Policies
September 2006: Over-Diversification
August 2006: My Favorite Financial Web Sites
July 2006: About that Dream Vacation Home
June 2006: Searching for Income
May 2006: Tax Planning for 2006
April 2006: Social Security, Take the Money and Run?
March 2006: How to Select a Mutual Fund
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