You go to work, you get paid. You use the regular and steady income from your job to pay your weekly and monthly bills. You use your paycheck to buy groceries, pay your mortgage and cover the heating bill.
But what happens when you retire? Where's your income going to come from when you are no longer working? How will you pay your monthly bills and daily expenses regardless of the economy, fluctuations in the stock market or shifting national politics and policies?
When you retire, there are a couple of key places that most Americans will look to for guaranteed income:
- Social Security
- Personal Assets
Let's take a closer look at each of these.
Social Security is a social insurance program. While you are working, you pay into the program and your employer pays a matching contribution. Then, when you retire (or become disabled) you are entitled to receive Social Security's benefits.
Most people count on social security to make up a proportion of their guaranteed retirement income. However, they make the mistake of completing a social security application without understanding how the timing of their application and other financial considerations can significantly affect amount of benefits for which they may be eligible.
Another common error is to fail to consider and plan for how social security benefits may change over time. For example, social security benefits can change with the death of a spouse.
As you consider your social security benefits, you will likely also need to be asking yourself: "What assets do I have that are guaranteed to be able to provide me with a monthly income?"
Since many Americans have a 401(k), let's take a moment to consider this financial vehicle as it relates to guaranteed income. We have all been encouraged to believe and hope that investment income from these plans will support us throughout our retirement.
Take a look at the figure below (Figure 2). Then ask yourself, "What will the value of my 401(k) be in one year? Five years? Ten Years?" That's right, you don't know. Neither does anyone else, including your personal financial advisor.
That's because our most common financial planning vehicles, such as the mutual funds within a 401(k), are investment products and not savings products. Consequently, the money you have in them is at risk of loss. Mutual funds inside a qualified plan do not produce predictable outcomes or offer any performance guarantees.
So when it comes to guaranteeing income for your retirement, it's wise to consider what financial vehicles will accomplish this goal.
[Excerpt from: Financial Independence in the 21st Century, 2012, page 43]