Financial Strategies for Guaranteed Income

You can create a financial strategy that evolves with you. Start by establishing goals for your future, such as your ideal retirement age, your ability to provide financially for children or other loved ones, and your standard of living.

Taxes are a part of life, but if you’re financially savvy, you can pacify Uncle Sam while keeping a greater percentage of your hard-earned money.

Financial products and savings vehicles such as 401(k)s and IRAs, CDs, and annuities allow you to legally defer or minimize your tax burden.

It’s common knowledge that contributing the maximum amount to your employer-sponsored 401(k) plan is one of the most effective means of saving for retirement.

Your pre-tax contributions lower your taxable income and allow your money to earn interest on a tax-deferred basis. Additionally, many employers offer a contribution match that boosts your retirement savings.

Likewise, both traditional and Roth IRAs are tax-favored savings accounts that guarantee income during retirement.

You can avoid the income and contribution limits on these accounts by diversifying your assets to get the highest tax savings.

When it comes to tax-preferred retirement accounts, the law can be unyielding in certain respects. For example, if you have a traditional IRA or 401(k), the IRS requires you to make withdrawals of certain minimum amounts when you turn 72 and every year after that. Those withdrawals are called required minimum distributions or RMDs.

RMDs can have tax implications that some retirees want to avoid, especially if they don’t need to spend the money when the withdrawals are required. And nonqualified annuities can help to mitigate this requirement.

If you want to leave your investment to a beneficiary, you can get a fixed annuity with a guaranteed death benefit rider. That way, you can take your RMDs as annuity payments, leaving the investment principal.

You can also use the money you’re required to withdraw because of RMDs to purchase a flexible premium fixed annuity. With a flexible premium annuity, you can continue to add to the annuity principal, and the annuity will continue to grow tax deferred.

This is not a way to avoid the immediate tax implications of the RMD, but it will help you make the money last moving forward.

A qualified longevity annuity contract (QLAC) is a deferred annuity purchased inside a qualified retirement account. Under the law, a QLAC can be purchased for 25 percent of the account balance up to $125,000.

The value of the annuity is exempt from required minimum distributions, which means a QLAC can reduce your RMDs by as much as 25 percent.

You are not required to take distributions from a QLAC until the age of 85. This allows the money to build over a longer time and to lead to greater payments from the annuity.

Annuities are one of the most effective ways to generate guaranteed income for life.

You can maximize the benefits from your annuity with a few approaches. For example, one strategy with a life annuity is to delay taking payments as long as possible. That’s because the older you are when you start taking payments from your annuity, the higher the payments will be.

If you start taking payouts as soon as you’re able, at age 59½, the monthly payments will be much lower than if you wait until age 75. This rule of thumb is really just common sense. The more payments you expect to receive, the lower the individual payments will be. And when you’re older, if you have something that’s supposed to pay the rest of your life, there will, by definition, be fewer and larger payments.

The catch here is you don’t know how long you’re going to live. If you wait too long, you may not get any benefit at all from your annuity. But if you’re relatively healthy and come from a family where people tend to live longer, the best strategy is to delay receiving annuity payments as long as you’re comfortable waiting. This strategy is similar to deciding when to claim Social Security benefits.

Another broad strategy you should keep in mind with buying annuities is to keep things simple. The more riders you buy and the more complex your annuity is, the more expensive it will be and the lower your payments will be.

Annuity laddering is a financial strategy that involves purchasing multiple annuities to get the best of changing market conditions.

The goal of annuity laddering is to maximize your return by dividing your principal among a variety of annuities at different times. This allows you to take advantage of changing interest rates without missing opportunities under the current market conditions.

For example, if you have $400,000 to spend on annuities, buy an annuity for $100,000 in each of four consecutive years. Or you can buy several annuities with different surrender periods. As each surrender period ends, you can evaluate whether to keep your money in the same annuity or withdraw it and buy a new one with better features.

You can also buy multiple deferred annuities that start paying out at different times, allowing more growth for the contracts with longer accumulation phases.

Charitable gift annuities offer donors and charities a win-win situation. They allow donors to transfer assets to a charitable organization in return for regular payment for the donor’s lifetime.

The donation is tax deductible, and the charity receives a gift equivalent to half of the funds contributed to the annuity.

According to the American Council on Gift Annuities, thousands of organizations, from the American Heart Association to Youth for Christ Foundation, offer charitable annuities as part of their fundraising efforts.

Ideally, you will have implemented a solid financial strategy soon after entering the workforce and don’t need to worry about generating additional income during retirement. But even the best-laid plans sometimes unravel.

If you find yourself in need of extra cash in retirement, you’re in good company.

Many retirees enjoy socially and intellectually fulfilling part-time work to increase their cash flow. Teaching, real estate, child care and consulting are among the many opportunities available to seniors.

In the age of the internet and social media, passive income ideas abound — from property rentals to growth investing. You have information and marketing channels at your fingertips.

As you devise your financial strategy, remember that the closer you get to retirement, the lower your risk tolerance becomes. This means you’ll want to look for more conservative investments and income products. For example, annuities and CDs are both safe income solutions.

When in doubt about the risk associated with a potential investment, it’s smart to seek the advice of a financial professional.

If you plan to retire early, now is the time to speak with a financial advisor about implementing an airtight financial strategy.

A movement known as FIRE — or Financial Independence, Retire Early — has gained traction recently. The strategy emphasizes aggressive saving and extreme discipline with expenses.

Once you’ve set your goals for early retirement, put your plan into action immediately. In addition to saving as much as you possibly can while still attending to your basic needs, take measures to optimize every dollar you spend.