It used to be that most people who worked were guaranteed a lifelong income from their employer in the form of a defined benefit pension plan. However, over the past few decades, employers have been overhauling their pension plans and, in some cases, eliminating them altogether. It’s a concerning sign of the times: after all, Americans now change careers an average of seven times over the course of their lifetime—and some even more than that.
Defined benefit pension plans have all but been replaced by 401(k) plans, shifting financial responsibility from employer to employee. That means that employees are now responsible for their own financial futures and their own guaranteed income planning.
There are two types of income to consider when planning for retirement: guaranteed and non-guaranteed. Non-guaranteed income is anything that’s subject to market changes and are not guaranteed to last a certain amount of time. Guaranteed income, on the other hand, is fixed and structured for a certain amount of time and can even be designed to last a lifetime. As you plan for retirement, you’ll want to find out how much of your income sources are guaranteed.
Non-Guaranteed Income—Risks and Rewards
Non-guaranteed income can come from sources such as 401(k)s, IRAs, and stocks, among others, in which the values of these accounts are subject to the performance of the investment strategy selected and the market. Even some investments considered to be conservative are non-guaranteed; while relatively stable, the return and future income amount is simply not set in stone.
There are clear risks to non-guaranteed income. In the event of a market downturn, the account values to which the non-guaranteed income is tied could be reduced significantly. On the flip side, with investments that contain greater risk, the return can also be greater allowing for a potentially greater account value.
Your Retirement Reality Tip
Income from non-guaranteed sources is sometimes called “variable” income, while a guaranteed income payment is often referred to as “fixed” income.
Guaranteed Income: Defined-Benefit Pensions, Reverse Mortgages, Annuities, and More
Guaranteed income can be generated from several sources and is by no means rare. Social Security is currently the most expansive program that provides guaranteed income. At a time when poverty ran rampant, the program was designed to provide assistance for older adults who were struggling financially. It was never intended to be the only source of income in retirement. Therefore, when planning for retirement, social security should only be relied upon for a portion of your income needs.
Private sources of guaranteed income can include:
- Company defined benefit pensions
- Reverse mortgages
- Bond portfolios
- Certificates of deposit (CDs)
- Mutual Funds
Each has its own benefits and drawbacks—no one source of guaranteed income is right for everyone. Learn about each source of guaranteed income in detail, about guaranteed retirement income benefits, and investigate the risks involved.
Guaranteed Income Sources versus Non-Guaranteed Income Sources
Income from each source has its pros and cons. For most people, a combination of guaranteed and non-guaranteed income provides both flexibility and reliability during retirement. Whether choosing to have more income from guaranteed sources or non-guaranteed sources, what’s important is that you plan taking into account all the possible scenarios.