Many retirees lack control over 50% or more of their retirement income. For example, if a retiree has income of $50,00 annually, and $30,000 comes from social security and employer pension, the retiree controls less than half of his retirement income—making those sources somewhat useless to discuss. So let’s focus on the sources of his retirement income you can control and how to boost them.
Let’s work up the ladder of rates that you can get from guaranteed retirement income sources.
Bank Certificates of Deposit
Terms from three months to five years. Generally, the longer the term, the higher the rate. Interest is available monthly for a guaranteed retirement income or can compound. A one-year CD is 1.29% at the highest paying bank as of 12/24/15. After inflation and taxes, you actually lose money. Therefore, holding large sums for long periods of time in CDs is financially foolish.
Guaranteed by the issuing company, safest companies rated AAA by Standard and Poor’s Large companies like Prudential and New York Life actually lent money to the US Government during the depression. Use deferred annuities (paying 3.30%) if you don’t need the income or immediate annuities if you need the income. A 70-year-old male can get $641/month for life on a $100,000 deposit (equal to 7.69% cash on cash return). Payments end at death and nothing is left. Some immediate annuities provide a feature for payments to heirs in case of early death, but the monthly payments will be less.
The above paragraph describes an immediate annuity—a one-time payment of a premium to an insurance company. In return, you receive payments for a specified term or for life. Under the life option, payments cease when you die. Note that immediate annuities may have fees or commutation charges and generally cannot be surrendered for value. Payments you receive are subject to IRS rules which consider each payment part principal and part interest. The payments are guaranteed by and subject to the claims-paying ability of the issuing insurance company.
Federally Backed Mortgage Notes
Although you’ve heard a lot in the new about Fannie Mae and Freddie Mac, the US government has backed their securities 100%--giving them AAA safety. The same goes for Ginnie Mae Securities. Your money is loaned for mortgages, and the government agency guarantees your investment—at 15 years, rates approximate 3.3%. Actual term is uncertain as people can pay off their mortgages early. Income is monthly.
Corporate Bonds and Preferred Shares
These can be a reliable source of guaranteed retirement income from corporations. Again, for safety, buy those that are highly rated, at least A. Bonds pay interest twice annually, and preferred shares pay dividends quarterly.
A source of guaranteed retirement income from cities, states or municipal districts. Buy those rated AAA for best security. Income is paid twice annually. Or, for another idea of guaranteed retirement income, build a ladder of zero-coupon municipal bonds. Interest and principal is paid all at once at maturity. Example: male age 52 buys $75,000 face value of municipal bonds to mature starting at age 62, and for each year thereafter for 20 years, to provide $75,000 of tax free income annually. The cost today of each bond averages less than 50 cents per dollar of face value—yields up to 4.8% tax free currently.
Dividend income from stocks and mutual funds can be important and significant source of retirement income, however, it is not assured as corporations may change their common stock dividends at any time. If you own mutual funds, there are funds oriented toward paying a consistent dividend income and those that do not. Are you in the right funds? Similarly, there are value stocks that pay dividends averaging 3.7%, while many growth stocks pay no dividends at all. By your selection of stocks and funds, you control this important source of retirement income.