Financial products exist to help retirees manage their portfolio’s decumulation, cover their retirement expenses, and protect against outliving their savings. These products include income annuities (also known as longevity annuities or longevity insurance), managed payout funds, and reverse mortgages. Depending on your financial situation, they can prove to be useful supplements to Social Security and any pensions you may have from employers.
Income annuities generate a guaranteed lifetime stream of income during retirement by converting a lump-sum premium into a retirement paycheck that continues for the rest of your life. They come in two forms: immediate (begin paychecks right away) or deferred (paychecks start later). These annuities provide a financial backstop that allows you to spend your retirement savings without fear of outliving your money. They also allow you to pool longevity risk, something other financial instruments, such as bonds, do not. One thing to keep in mind: income annuities have no cash value, therefore they are not a liquid asset, meaning you can’t access the money if you need it in an emergency.
Managed Payout Funds
Managed payout funds are a way of providing a steady monthly income that keeps up with inflation. The allocation of payments may change over time to avoid eating away at the principal investment payment, which brings us to a downside of managed payout funds: they don’t provide a guaranteed lifetime stream of income. They can also expose investors to downside risk due to high allocations toward equities. Nevertheless, this is another tool for generating retirement income.
Reverse mortgages, despite some heat in the media, can provide retirees with additional retirement income when used correctly. They allow homeowners over age 62 to use their home equity as a tax-free source of funds. Generally, the older you are, the more value you can generate from your home, and the lower the interest rate, the more money you can borrow. However, reverse mortgages are not without a fair share of fees and a strict deadline for pay off once the last surviving borrower passes away or moves out of the home.
Prepare yourself for retirement with our Retirement Planning Guide, which covers other financial products and offers tips for every stage of the retirement planning process.