Converting Retirement Plans Into Income Efficiently

Shawn Plummer

CEO, The Annuity Expert

How do I convert my 401k to a reliable retirement income? This guide will compare methods of converting a retirement savings plan (IRA, 401k, Investments) into an efficient income stream during retirement.

The process of saving for retirement is commonly understood, save a certain amount each year, invest it, and give your nest egg time to grow. But once you are ready to retire and start living on that income, things can quickly become confusing.

If you spend any time on the internet, you will quickly discover many approaches to generating retirement income. To help you evaluate those approaches, a concept called equivalent portfolio value, or EPV, can be helpful.

This guide applies to the following retirement plans:

  • 401(k)
  • 401(a)
  • 457
  • 403(b)
  • IRA
  • Roth IRA
  • SIMPLE IRA
  • SEP IRA
  • Profit Sharing Plans
  • Defined Benefit Plans
  • Pension Plans
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Equivalent Portfolio Value

Simply put, equivalent portfolio value evaluates how much income one approach can generate versus another and what it will take for two different approaches to generate the same income level.

Draw-Down Approach Vs. Fixed Index Annuity

To help see this, consider siblings Bill and Jill. Both spent their working years saving for retirement. They were planning to retire in five years, and each of them had identified a portion of their savings, $550,000, from which to generate retirement income.

After doing some math, Bill and Jill determined that they would need $40,000 a year from this portion of their savings to meet their retirement income needs.

Draw-Down Approach

Bill decides to use a draw-down approach while maintaining an asset allocation strategy, withdrawing 4% annually based on his $550,000 today. However, 4% would only generate $22,000, just over half of what he needs. To generate the $40,000 from his investment plan, his $550,000 will need to grow to $1 million in five years or 82%.

Fixed Index Annuity

Alternatively, Jill decides to utilize a fixed index annuity to generate the $40,000. The fixed index annuity guarantees that if Jill places $550,000 in it today, in five years, the insurance company will begin paying her the $40,000 she needs each year for as long as she lives.

To put it another way, Jill’s $550,000 fixed index annuity has an EPV of $1 million. So using a fixed index annuity, Jill has peace of mind that she will receive the income she needs in retirement.

On the other hand, for Bill to generate the level of income he needs, his draw-down approach would require his portfolio to earn an annual rate of return of 12.72% before fees and taxes every year for the next five years. Only then will bill have the $1 million he needs for retirement.

The Insurance Company

Using EPV can be useful to compare retirement income approaches, but how is it that Jill’s $550,000 can do the work of 1 million?

It is because Jill is tapping into one of the unique strengths of insurance companies. Insurance companies can pool risk across tens of thousands of people.

With insurance companies, we can do more together than we can alone. Bill, on the other hand, must face the risks of retirement all by himself. If there is a financial mishap, he only has himself to manage the impact of that setback.

So, contact us if a fixed index annuity might be right for you.

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Frequently Asked Questions

How much retirement income does $500,000 generate?

For example, $500,000 will generate between $2,083 and $9,525 per month over a single person’s lifetime or between $1,875 and $5,575 per month for both spouse’s lifetimes if an annuity is utilized to distribute the retirement income. Income amounts are factored by age and the length of time before starting the retirement income distribution.

What is the most accurate way to estimate retirement income?

Annuities are the only retirement plan in the United States to guarantee an income for life even if the annuity runs out of money. Because the income is guaranteed, annuities are the only accurate method of estimating retirement income, now and in the future.

How much money do you need to retire with a $100,000 a year income?

Between $437,436 and $2,000,000 will generate $100,000 a year in retirement income, guaranteed, if utilizing an annuity. The retirement savings amounts are factored by the retiree’s age and the length of time before starting the retirement income distribution.

What is the best investment for retirement income?

Annuities are the only retirement plan in the United States to guarantee an income for life even if the annuity runs out of money. Because the income is accurate and guaranteed, annuities are the best investment for retirement income, now and in the future.

How much money do I need to invest to make $3,000 a month?

Between $157,477 and $720,000 will generate $3,000 a month in retirement income, guaranteed if utilizing an annuity. The retirement savings amounts are factored by the retiree’s age and the length of time before starting the retirement income distribution.

Can I retire on $700,000?

$700,000 will generate between $2,917 and $13,335 per month over a single person’s lifetime or between $2,631 and $12,325 per month for both spouse’s lifetimes if an annuity is utilized to distribute the retirement income. Income amounts are factored by age and the length of time before starting the retirement income distribution.

How long with $800,000 last in Retirement?

If an annuity is utilized to distribute retirement income, $800,000 will generate between $3,333 and $15,240 per month for the rest of the retiree’s lifetime, guaranteed. Monthly income amounts are factored by age and the length of time before starting the retirement income distribution.

Can I retire on $500k plus Social Security?

$500,000 will generate between $2,083 and $9,525 per month if an annuity is utilized to distribute the retirement income. Income amounts are factored by age and the length of time before starting the retirement income distribution. The average monthly income from Social Security is $1,543 per person. Therefore, an average monthly retirement income can range between $3,626 and $12,611, which is enough to retire comfortably.

Can a couple retire on 2 million dollars?

$2,000,000 will generate between $7,517 and $35,214 per month for the entirety of the couple’s lifetimes if an annuity is utilized to distribute the retirement income. Income amounts are factored by age and the length of time before starting the retirement income distribution. The average monthly income from Social Security is $3,086 per couple. Therefore, an average monthly retirement income can range between $10,603 and $38,300, which is enough to retire comfortably.

How long will $100,000 last in retirement?

$100,000 will generate between $417 and $1,905 a month for a retiree’s lifetime, even if the annuity runs out of money. This is because income amounts are factored by age and the length of time before starting the retirement income distribution. In addition to the income generated from the annuity, Social Security Benefits will be accessible at age 62 with an average monthly income of $1,543 per person.

How do I protect my 401k after retirement?

Rolling a 401(k) into an IRA fixed index annuity will protect the retirement plan from stock market loss and distribute an income that will last a lifetime even if the IRA annuity has run out of money.

What guarantees a steady stream of income in retirement?

Annuities are the only retirement plan to guarantee a retiree an income for life, even if the annuity runs out of money.

How can I maximize my retirement income?

Utilizing an annuity to generate an income for life combined with Social Security Income will maximize retirement savings over an entire lifetime. In addition, deferring Social Security Benefits until age 70 will further maximize a retirement income.

How much money do I need to invest to make $500 a month?

Investing between $26,246 and $120,000 will generate $500 a month in retirement income, guaranteed if utilizing an annuity. The retirement savings amounts are factored by the retiree’s age and the length of time before starting the retirement income distribution.

How much money do I need to invest to make $2,000 a month?

Investing between $104,985 and $480,000 will generate $2,000 a month in retirement income, guaranteed if utilizing an annuity. The retirement savings amounts are factored by the retiree’s age and the length of time before starting the retirement income distribution.

How much income will 3 million generate?

$3,000,000 will generate between $150,000 and $686,814 per year over a single person’s lifetime if an annuity is utilized to distribute the retirement income. Income amounts are factored by age and the length of time before starting the retirement income distribution.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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