Annual incomes make it easier for retirees to spend, according to research

Currently, with fewer business pensions, some retirees are hesitant to take their eggs out of the nest. However, older Americans can spend more freely with a guaranteed source of income, such as Social Security or private income.

According to a research paper that examines retirement spending. The report compared retirees with a lifetime income stream and those living on an investment portfolio.

The findings suggest that retirees with guaranteed incomes may spend twice as much as those who take advantage of the wealth of their retirement savings.

“People don’t like the idea of ​​seeing their nest eggs shrink,” said the report’s 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 with ample savings, even when they do not want to pass on wealth to heirs, he said.

According to the Bureau of Labor Statistics, approximately 67% of private industry workers had access to retirement plans by 2020. However, many retirees have difficulty spending their money once they leave the workforce.

While retirees with a clear spending strategy tend to be happier, 25% have no plans, according to a BlackRock report.

“The whole purpose of the 401 (k) system is to encourage people to live better retiring,” Finke said. “But we haven’t really developed a system that allows them to do that once they retire.”

While workers can benefit from plan annuities, less than 10% of workplace retirement plans offered the option in 2019, according to the Plan Sponsor Council of America.

Those worried about surviving on savings can consider buying a private annuity that offers monthly payments for life.

For example, let’s say a 65-year-old woman in Tennessee expects to spend $ 50,000 a year. With $ 30,000 a year from Social Security, you may want an annuity to cover the remaining $ 20,000.

If you want your income to start within five years, your premiums could start at about $ 274,000, covering you for life, with no minimum payment or death benefit for heirs, according to the Income Estimator. Schwab’s income.

However, financial experts say retirees should explore all options before buying an annuity.

“They 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.”

Before enrolling, retirees must assess their complete financial situation, he said.

“It’s a difficult decision and it can’t be made in isolation,” Watson said. “All of these things fit together.”

A retirement expense plan doesn’t stagnate. Customers can adjust periodically based on the stock market and other life changes, he said.

“Often, you can make customers feel much more comfortable by spending those assets and feeling more empowered to be able to do that,” Watson said.

Another way to increase guaranteed income is to delay Social Security. Those waiting until full retirement age to collect may receive higher monthly payments for life, depending on their year of birth. Retirees can get higher benefits up to the age of 70.

For example, suppose someone was born in 1957 and qualifies for $ 1,000 a month. If payments begin at age 62, they will only receive $ 725, a 27.5% lifetime reduction, according to the Social Security Administration.