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Comparing Retirement Income Investments

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Before you make a retirement income investment, compare the investment to several alternatives.

    For each retirement income investment you are considering, write down the following:
  • Cost per $1,000 of monthly income.
  • Length or term of income.
  • Pros
  • Cons

See the sample comparison below as an example.

The costs per $1,000 a month of income stated below are real-life examples with pricing as of August 2010, however, as interest rates and market conditions change, costs will change. Be sure to do your own comparison at the time you are looking.

Goal: to generate $1,000 per month of consistent retirement income in addition to social security.

Retirement Income Option 1: Retirement Income Notes

    Cost per $1,000/month of income:
  • For 15 year Term: $126,000 - $139,000
  • For 20 year Term: $146,000 - $165,000
  • For 25 year Term: $161,000 - $186,000
  • For 30 year Term: $172,000 - $202,000
    Term
  • Specified above.
    Pros
  • Guaranteed income for a set period of time.
  • Notes can be sold (just like a bond) on the secondary market, providing liquidity if you want, or need, to cash them in prior to the end of their term.
    Cons
  • Income only lasts through the term of the note. If you live longer, you’ll need other sources of income to rely on at that point.
  • Like any corporate bond, the note is a senior, unsecured debt of the bank or company issuing it.

Learn more: Barclay’s Retirement Income Notes

Retirement Income Option 2: Immediate Annuity

Cost per $1,000/month of income:

  • Single life, male age 65
    • Life only: $159,835
    • Life with 20 year term certain: $161,290
  • Joint life, both age 65
    • Joint lives: $197,023
    • Joint lives with 20 year term certain: $201,812
    Term
  • Specified above.
    Pros
  • Immediate annuities guarantee income for life. You cannot outlive your money.
    Cons
  • Purchasing an immediate annuity is generally an irreversible decision. You cannot change your mind and get back out of the investment.
  • If you buy a life-only annuity, and die quickly, your remaining funds do not pass along to heirs. Choosing a term-certain payout can minimize this risk.

Learn more: Everything You Need To Know About Immediate Annuities

Retirement Income Option 3: Variable Annuity With Lifetime Income Rider

    Cost per $1,000/month of income:
  • $240,000 provided insurance company offers a 5% guaranteed withdrawal starting at age 65.
    Term
  • 5% withdrawal of initial deposit amount is guaranteed for life.
    Pros
  • Your income can rise if underlying investment portfolio does well.
  • Your initial income amount is guaranteed for life. You cannot outlive your money.
  • You have access to your principal along the way, although if you take excess withdrawals it will reduce the amount of your future guaranteed income.
  • Any remaining funds are passed along to heirs upon your death.
    Cons
  • Your guarantee is only as good as the financial strength of the insurance company behind it, although in the event of an insurance company failure, each state has a state guaranty association that offers an additional layer of protection.

Learn more: Guaranteed Withdrawals And Lifetime Income Riders

Retirement Income Option 4: Retirement Income Fund

    Cost per $1,000/month of income:
  • $240,000 - $300,000, depending on payout rate of the fund.
    Term
  • There is no set term on most retirement income funds. The fund manager will adjust the withdrawals up or down as necessary depending on market conditions.
    Pros
  • Professional investment management at low cost for the purpose of producing reliable retirement income.
  • Your income can rise if underlying investment portfolio does well.
  • You can access principal as needed.
  • Any remaining funds are passed along to heirs.
    Cons
  • Income amount and principal will vary with market conditions.
  • You run the risk of running out of money if you spend too much and the investments do not perform well.

Learn more: Retirement Income Funds – Worth A Look

Retirement Income Option 5: Self-managed or advisor-managed Investments

    Cost per $1,000/month of income:
  • $240,000 - $300,000 of capital per $1,000/month income assuming a 4 - 5% withdrawal rate.
    Term
  • There is not set term. It is up to you to manage your withdrawals so you do not run out of money.
    Pros
  • Your income can rise if underlying investment portfolio does well.
  • You and your advisor have complete control and the flexibility to change investments as needed.
  • You can access principal as needed, and any remaining funds are passed along to heirs.
    Cons
  • Your income and principal will vary with market conditions.
  • You run the risk of running out of money if you spend too much and the investments do not perform well.

Learn more: Withdrawal Rate Strategies For Creating Retirement Income From A Portfolio

Summary Of Retirement Income Investment Comparison

As you compare the retirement income investments above, notice that the cost to guarantee a level income, such as in the retirement income notes, or immediate annuities, is slightly less than the other alternatives. This is because with those two investments each income payment is composed of principal and interest.

As you move into choosing retirement income investments that allow the possibility of a rising income, such as with the variable annuities with the guaranteed withdrawal rider, a retirement income fund, or a self-managed portfolio, the cost is higher because you need a little more principal to start with to give you the best odds of income that lasts. With these options you have the potential for higher income, but also additional risk.

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