A new way of thinking about how much money you'll need in retirement

How will you cover your expenses when you’re no longer receiving a paycheck? And how much money will you need in retirement? Those are questions that most retirees – and those approaching retirement – struggle to answer.

Most of us will rely on monthly Social Security payments and whatever we can generate from our savings, since fewer Americans have pensions or other sources of protected lifetime income. However, Social Security typically accounts for only up to 40% to 50% of the monthly income retirees need, and that can leave a gap that often requires you to tap into a substantial portion of your savings to make up the difference. And with Americans living longer than ever before, many retirees are concerned about making their money last, especially with ongoing worries about market volatility, inflation and medical care costs.

One solution is to think differently about the income you’ll need in retirement. Calculating your income on a monthly basis (versus annually or over a longer period) can provide you with a better gauge of what to expect in retirement.

Looking at your retirement income from a monthly perspective gives you a more realistic idea of what your income will be and whether that will be enough to cover your expected expenses. It’s easier to estimate your monthly expenses and then compare that to what you can generate in income – your Social Security + pension (if you have one) + savings.

If there’s a gap between what you expect you’ll need and your income, then you need to decide how to cover that.

One way to do that is by placing some of your savings into an annuity to generate protected lifetime income. An annuity is simply a contract between you and an insurance company where you contribute money up front then receive payments over a period of time. You can receive those payments a variety of ways, including through an income stream that lasts your whole life.

Like many investment products, annuities continue to evolve to meet the needs of today’s retirees, providing options that can let you leave a legacy to your family, or allow you to make withdrawals as needed. There are even options that allow you to participate in a portion of the potential growth in the stock market without risk of losing your principal, which can be valuable in today’s high-volatility market environment. Talk to your financial advisor about what options might work for you.

One advantage of investing in an annuity is that it may be able to generate more income per dollar in retirement than you would receive if you followed a 4% per year systematic withdrawal from your investments, an approach that is referenced in many retirement planning articles. Purchasing an annuity can provide you with additional dollars for monthly expenses, or allow you to do more in retirement.

If you’re already retired, then calculating your monthly income and expenses is an important part of understanding where you are, and having the confidence that your money will last for as long as you need it.

But generally speaking the earlier you can start planning the better. So if you’re five to 10 years away from retiring, you can know how you’re tracking and whether you need to “catch up” by saving more during your final working years. If you do, an annuity may be able to help, allowing you to protect and grow your savings or income at a time when you might typically be moving your money into less-risky investments.

Also if available, consider investing in an annuity within your qualified plan, such as a 401(k) or 403(b). You can accumulate savings in an annuity during your working years so you’ll already have protected lifetime income for when you retire. Talk to your plan administrator about your options.

Funding your retirement doesn’t need to be a “wait and worry” process. Work with your financial advisor to determine what your monthly income and expenses will be and if the protected lifetime income from an annuity might help you relax and get more enjoyment from retirement.

Source: Alliance for Lifetime Income

Typically, variable annuities have mortality and expense charges, account fees, investment management fees and administration fees. Annuity policies have exclusions and limitations, early withdrawals may be subject to surrender charges and, if taken prior to age 59 1/2, a 10% federal income tax penalty. 

Variable annuities are subject to investment risks, including possible loss of principal invested.  

Withdrawals are reported as income and are subject to ordinary income tax treatment (as opposed to capital gain or dividend income), and if made prior to age 59 ½, may be subject to an additional 10% federal income tax penalty. In addition, company imposed surrender charges may apply to certain withdrawals. Annuities are long-term financial products designed for retirement purposes. Variable investment options within variable annuities are subject to fluctuation in value and market risk, including the possibility of loss of principal. In addition, annuity policies have limitations and a charge for withdrawals in the policy’s early years.  For costs and complete details, contact your Equitable Advisors financial professional.

Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (Equitable Financial) (NY, NY), Equitable Financial Life Insurance Company of America (Equitable America), an AZ stock company, and Equitable Distributors, LLC.  Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN). Alliance for Lifetime Income is not affiliated with or endorsed by Equitable, Equitable Advisors or any of its affiliated companies. 

GE-5831724.1 (07/2023) (Exp. 07/2025)