Defined-benefit pensions are mostly a thing of the past at private companies, and even government agencies are switching more and more to defined-contribution plans. That can make it difficult to come up with a steady stream of income in retirement. If you simply have a 401(k) plan and/or an individual retirement account, you may have trouble getting your withdrawals right. However, there are alternatives that can provide you a steady source of cash in your later years.
Annuities are contracts that you buy with insurance companies. You either agree to make payments over time or to provide a lump sum payment upfront. The insurance company invests your money, offers a guaranteed rate of return and then starts paying you a monthly stream of income at some point when you retire. Buying an annuity helps to protect all or part of your retirement nest egg while also providing you regular, predictable payments in retirement. Annuities do have some drawbacks, though. There are fees involved, and you will face surrender charges in the early years if you need to get your money back. You also give up potential investment gains in return for safety and predictability.
A reverse mortgage works just like its name implies. Instead of you paying a mortgage company to reduce the debt on your home and increase your equity, a company pays you based on the equity in your home. A reverse mortgage allows you to basically sell your home to someone else, get all the proceeds and still live in the home. This gives you cash to spend in retirement however you want. When you die or want to move into a senior facility, the house goes to the reverse mortgage company, but not until then, And the company takes on the risk that the house might be worth less. You do have to continue paying the property taxes, though.
If you have won a lawsuit judgment, you can choose to receive the proceeds in equal monthly payments over a period of time instead of in a lump sum. This is called a structured settlement, and it’s something to seriously consider if you are in or close to retirement. Because lawsuit proceeds are tax free, having a structured settlement can give you a steady stream of tax-free income during your retirement years. There are few if any drawbacks to a structured settlement.