Convert Retirement Savings into Long Term Income

Saving for your investment is not enough, you must convert your retirement savings into long term income in order to have a secure retirement. Why? Because no one knows for sure how long you will need an income for and you may outlive your savings if you do not have any income during retirement.

Today life spans are ever increasing. While this is the good news, the longer you expect to live, the more financial resources you will need. Below is a table showing average life expectancy based on your current age. For example, if you are 55 today, on average you will live to be 82. If you retired today, you will likely need (82-55) 27 years of income.

Current Age Life Expectancy Current Age Life Expectancy Current Age Life Expectancy Current Age Life Expectancy
51 81 61 83 71 85 81 89
52 81 62 83 72 86 82 90
53 81 63 83 73 86 83 90
54 81 64 83 74 86 84 91
55 82 65 84 75 87 85 91
56 82 66 84 76 87 86 92
57 82 67 84 77 87 87 92
58 82 68 84 78 88 88 93
59 82 69 85 79 88 89 94
60 82 70 85 80 89 90 94

Note: The data in the table comes from: Life Expectancy Tables. We averaged together life expectancy for men and women to simplify things.

Inflation and Purchasing Power

Inflation decreases purchasing power over time and erodes real savings and investment returns. For example, According to one inflation calculator, you would have to spend $1,617 today to buy the same amount of goods and services that you could have bought in 1980 with $500. Therefore, when it comes to estimating how much savings you will need, you must consider the impact of inflation.

For example, suppose you are 60 and plan to take out $5000/Mo for the remainder of your life. According to the Life Expectancy table, if you are 60 today, on average you can expect to live to 82. This means you will be withdrawing the same purchasing power as $5,000/Mo is worth today for 22 years. Assuming an 5% annual inflation, you will need to withdraw $97,729 10 years from now to have the same purchasing power as $60,000 (12 x $5,000) has today. The list below shows the amount of money you will need to accumulate before you start withdrawing funds for 22 years, based on the rate of future inflation.

  • 0%: $1,320,000
  • 3%: $1,887,041
  • 5%: $2,425,688
  • 7%: $3,146,020

As you can see, the rate of inflation makes a huge difference in the amount you need to accumulate.

What about making enough on the stock market to cover inflation?

Market Turbulence

Below is a one year chart of the S&P 500. As you can see, there has been a lot of ups and downs in the last 12 months.

stock market Market Turbulence

While it is true that over 20 or 30 years the stock market has performed well, you are not "living on averages". You will need to withdraw the same buying power every month, regardless of what is happening on the market. And, each withdrawal will decrease the amount of working capital you have. And at the end of the expected number of years, you will have no remaining funds. What if you lived longer than expected, or inflation was higher than you expected, or the market went through a significant down time, you could outlive your funds.

There is a safer approach.

Converting Retirement Savings into a Real Estate Income Stream

Real estate is the common mans path to financial security. Some of the key advantages of real estate:

  • Security. As long as you buy property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases.
  • Long term income. You will not outlive a real estate income stream. And you can pass this income stream to your children and your children's children.
  • Inflation friendly. Rents have historically tracked inflation therefore the buying power of the net rent you receive will remain constant or increase.
  • Long term fixed rate financing. You can add an income producing property to your portfolio for a fraction of the purchase price and lock in your debt services against inflation.
  • Tax advantages. One of the biggest is depreciation that you are required to deduct on rental properties. This means that while the property generates a positive cash flow, once you deduct all expenses plus depreciation, you could have a tax loss. Yes, positive cash flow into your bank while having a negative cash flow to the IRS. This not only shields your cash flow from the rental properties, it may also shield other income from being taxed.
  • Passive. With the property being managed by a good property manager, you have very little to do. Most clients tell us that they spend 10 to 15 minutes a month looking at their owners statement from the property manager. None of our clients have personally made repairs to the properties, or looked for new tenants.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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If you are looking for an income steam that you and your children will not outlive, real estate may be the right answer for you.