Along with colleagues Assistant Managing Editor Barbara Whelehan and reporters Shelly Schwartz and Sheyna Steiner, I've been working on a Bankrate.com project that examines retirement income.
If you thought saving for retirement was hard, wait until you try taking your money out of your savings and living on it month after month. That steady pension that your parents and grandparents had will look better and better.
Our goal was to figure out the best ways to provide a $3,000 a month predictable stream of income that could augment the average Social Security paycheck, which, according to Social Security, was $1,177 in January 2011. You add those two together and it is just about $50,000 a year -- enough to live comfortably in most parts of country, especially if you own your own home.
So the question is, what does it take to earn $3,000 a month?
Immediate annuites. In this package of stories, I wrote about immediate annuities -- the kind anybody can buy and the growing option to offer them within a 401(k). However you buy the annuity, if you want $3,000 a month for the rest of your life with nothing left at the end, you'll need almost exactly $500,000 at today's rates. If you want the amount you receive to grow 3 percent a year with inflation, then you'll need $650,000. These estimates reflect calculations from Income Solutions, an annuity purchase program of Hueler Investment Services. Fees can be a big factor here with some of these plans scraping off more than 2 percent a year. Before you lock up your money, ask for the fee details and get the answer in writing.
Investing directly. If you don't want to tie up your money and you'd prefer to invest it in a conservative combination of stocks, bonds, certificates of deposit, etc., here's where three different investment managers would put your money. All three suggest putting at least 50 percent in fixed-income investments like U.S. Treasuries. Because of that conservative approach, in order to pull off $30,000 in income a year at today's rates, you'll need $625,000. We asked our advisers to consider an investment of $500,000 and they said at that level, they would advise retirees to take out only $25,000 a year.
Turning your money over to somebody else to manage is another reason to be mindful of costs. It can be difficult to figure out exactly what the total management fee is in these circumstances because what you're paying the adviser and what you're paying in investment fees are hard to separate. But before you decide to cut an adviser out of the picture and invest directly, make sure that you aren't paying premium fees on the investment vehicles you choose. You can find top-notch investments for well under 1 percent if you look.
Income funds. Finally, if you're seeking a compromise, consider a retirement income mutual fund. This is a one-size-fits-all solution, so if you go this route, you'll need to be flexible -- take out less in the years where the returns are low. We've created a chart that spells out philosophy, returns and fees to help you make a choice. The category average over the last three years has been 3.15 percent, according to Lipper.
We hope you'll take a look at this package of stories. Even if you're not anywhere close to this stage in your retirement planning, you'll find what you read here enlightening.