There are essentially only three ways to generate a monthly paycheck from retirement savings:

RIG #1: Invest the savings, and spend just the investment earnings, which typically consists of interest and dividends. Don't touch the principal.
RIG #2: Invest the savings, and draw down the principal cautiously so as not to outlive their assets. This method is called "systematic withdrawals."
RIG #3: Buy an immediate annuity from an insurance company, and live off the monthly benefit the insurance company pays to the retiree.

These RIGS each have their advantages and disadvantages; there's not one magic bullet that works best for everybody. Most important, each type of RIG generates a different amount of retirement income:

RIG #1, interest and dividends, typically pays an annual income ranging from 2 percent to 3.5 percent of savings, depending on the specific investments selected and the allocation between stocks, bonds, cash, and real estate investments.
RIG #2, systematic withdrawals, typically pays an annual income that ranges from 3.5 percent to 5 percent of savings, depending on the specific investments, the age of the retiree, and how cautious retirees are about the odds of exhausting their savings before they die.
RIG #3, immediate annuities, can range from 4 percent to 6.5 percent of savings, depending on the type of annuity that's purchased, the retiree's age and sex, and whether the annuity income is continued to a beneficiary after the retiree's death.

Next: How can plan sponsors help?

Instant Insights /

How to help employees from going broke in retirement

More From HR Executive

Related Stories

Recommended For You