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Once you’ve set up the financial side of your retirement, you can do whatever you want in retirement.  But that’s the rub, isn’t it?  Setting up the financial side is perhaps the trickiest part of retirement.

For many Americans, retirement income includes multiple sources of income.  These should be organized and stacked by risk.  Your retirement income “stack” might look something like this:

Your retirement expenses (red) must be paid by having enough total income (the income stack).  That income stack is layered from lower risk to higher risk sources of income.

Social Security, for example, is

  • Guaranteed by the US Government
  • Inflation-protected
  • You cannot outlive it
  • Your benefit is taxed only up to 85%

For those reasons, Social Security is the least risky and is shown as the foundation of all income sources in the income stack.  (See our Social Security section:  “Aim Before You Claim”.)

The other sources of income (you can use them as a preretirement income checklist) can be explained as follows:

  • Annuities/Pension – You’ve already paid for these.  Income is distributed to you by the claims paying ability of the institution from which it’s paid to you.  Be careful when you set up that pension.  You, generally, have options to consider which cannot be change once made.  Also, does the institution responsible for paying your pension have the financial strength to pay it for 20-30 years?  You, generally, have options there, too.
  • Business/Real Estate interests – You may have some control over this operation but otherwise the income derived is backed by either a business or rent, assumed to be relatively reliable.  Do you need to manage it to make it reliable?  For how long can you do that into your retirement?
  • Investments – You do not have control over the performance of these securities other than selection of which investments to own.  In a down market, you may have to use principal as income.
  • Earned Income – Also known as work or paycheck income.  It’s the most risky because you likely cannot work until the day you die.  So, you might not be able to count on this income for the duration of your retirement.

Reducing Retirement Income Risk

Your income has got to be there every month in retirement because your old paycheck won’t be there but your bills will.

So, how to make retirement income more reliable, less risky?

Reliability – Setting up your income to come from an institution with sufficient, long term financial strength can help ensure your income is paid when due.  If your old employer is the electric utility, you may not worry.  Will your old employer be able to pay you income 20-30 years from now?

Inflation-protected – Deflation is possible but inflation has been the norm.  Retirees who need $100 this year to buy a good/service will next year need $100 plus the rate of inflation.  If inflation is 2% this year, you’ll need $102 next year.  Inflation compounds (next year’s inflation will be on the $102, not the original $100) and you’ll need a retirement strategy that pays you more each year.  That is, if your expenses inflate you have to set up your income to inflate, too.  An annuity, insurance policy, investment, or some combination of those may be set up to do that.

Longevity – This is the risk of outliving your income.  You need a strategy that has your income lasting as long as you last.

That’s why annuities are situated right above Social Security in the income stack shown above.  Annuities are a life insurance product.  When was the last time you saw a life insurance company not pay a death benefit or default on an annuity?  Almost never–especially with highly rated insurance companies.

How do annuities work?  They are the mirror image of how life insurance works.  With life insurance, you pay a premium over many years and your beneficiary gets a lump sum when you die.  With annuities, you pay the insurance company a lump sum first.  The insurance company then pays you a stream of income, often, until you die.  For the life insurance company, annuities balance out their life insurance cash flow.

How an annuity (generally) works.

For you, the life insurance company is generally a financial institution with long term asset management expertise.  There’s a reason many of them have been around for over 100 years.  They are very good at making and keeping long term promises.

When you need to count on income replacement (from a life insurance policy) or a reliable stream of retirement income (from an annuity), a highly rated life insurance company is as financially strong of a retirement income partner as it gets.

Life Insurance Replaces Income

A life insurance policy would provide a lump sum, say, to the surviving spouse or family of a deceased parent, replacing income to the household that the survivors need to preserve their financial interests.  That is, the death benefit serves to replace income to the household that would have been received by the deceased but stopped being paid when the deceased died.

Long Term Care/Medicare

Long term care (also known as elderly care) and Medicare (either traditional Medicare or Medicare Advantage) are types of insurance coverage to help manage the risk of large expenses generally later in life.

As we age we’re more likely to need care of some kind.  That can be expensive.  Having insurance helps to spread that expense risk over many individuals, providing the funds to pay for these services to those who need it.  That helps to smoothe one’s retirement expenses, preventing spikes in expenses which may be too much for any single individual to pay.


  • Insurance and annuities help can be used to help make retirement income and catastrophic expense risk less risky.
  • Financially strong institutions can be used to reduce many types of risks in retirement.