How to Create a Retirement Paycheck You Can’t Outlive

Are you terrified of outliving your retirement savings? You’re not alone. Many retirees share this fear, and finding the right balance between spending and saving can be overwhelming. That’s why an increasing number of people are turning to annuities – financial tools that transform your savings into a reliable “retirement paycheck” and providing guaranteed income for life.

The Fear of Running out of Money

Change can be scary, and retirement is a big change, so it’s not surprising that people have some retirement-related fears. For many people, it’s not the thought of old age or loneliness that keeps them up at night. It’s the fear of running out of money.

A GOBankingRates survey found that 66% of Americans are afraid that they will run out of money, making this the most common fear related to retiring. If you share this fear, you’re in good company.

Why Running out of Retirement Money Is a Real Risk

Unfortunately, running out of money in retirement is not an entirely unfounded fear. According to a 2024 Morningstar study, 45% of Americans will run out of money in retirement.

This does not mean that you will run out of money. If you have sufficient savings, and if you leverage smart retirement planning strategies, you may be fine. However, several factors make these objectives challenging for some retirees.

1. Many retirees lack sufficient retirement income. Most retirees qualify for Social Security, but with an average Social Security retirement benefit of just $1,976 a month as of January 2025, this isn’t enough for most people to live on. Without another source of retirement income, retirees may struggle financially.
2. Defined contribution retirement plans have largely replaced defined benefit retirement plans. A defined benefit plan is a pension. It pays a set retirement income for life. Defined contribution plans, such as 401(k)s, let employees control investment accounts, and how much they receive during retirement depends on these investments. According to the Federal Reserve Bank of St. Louis, around 60% of workers had defined benefit retirement plans, or pensions, in 1989, but by 2022, this had fallen to around 20%. Meanwhile, 401(k) plans and other defined contribution plans have become more common. Although defined contribution plans have some advantages, they also leave retirees vulnerable to the whims of the market. Instead of knowing exactly how much they’ll receive with a pension, retirees with 401(k) plans have to create smart withdrawal strategies and hope the market doesn’t crash, leading to more retirement uncertainty.
3. Going back to work isn’t always practical. When you retire, you’re presumably ready to give up work so you can focus on things like hobbies, travel and family. Even if you want to go back to work, you might not have the skills that are in demand or the physical health needed to land a good job.
4. No one knows how long they’ll live. Planning for a 20-year retirement is a lot different than planning for a 40-year retirement. Although you can make guesses based on your current health, lifestyle, and family history, no one really knows how much time they have left. If you’re blessed with a long, healthy life, you may find you don’t have enough savings.

How Retirement Income Planning Provides a Solution

How much money do you really need to retire comfortably? One million dollars? Two million dollars? Less than that? Or even more? It’s hard to say because there are many unknowns, most notably how long your retirement will last.

It’s much easier to calculate how much money you’ll need when you look at a monthly retirement income strategy. You can do this by planning for phases within your retirement, which are often broken down into the Go-Go, Slow-Go and No-Go years.

• The Go-Go period is when you are still young and able to travel, socialize and lead an active life. For many, the Go-Go years last until their mid to late 70s. Spending tends to be higher during this initial period.
• Then you’ll progress into your Slow-Go years. During this phase, you stay home more, and you may sell your home or downsize. For many retirees, less income is needed during this phase.
• During the final phase, the No-Go years, you may need to pay for assisted living, long-term care or increased medical expenses. For these reasons, spending may increase during this period.

In 2023, the average retired household spent $5,000 per month to cover all expenses including housing, healthcare, food and transportation, according to the U.S. Bureau of Labor Statistics. Using the phases above, we can project that the average retiree may spend $6,000 per month during their Go-Go years, $4,000 per month during their Slow-Go years, and $5,500 per month during their No-Go years. Your own monthly retirement income strategy may be much different than this example.

By projecting your estimated monthly needs within each phase, instead of solely focusing on the financial needs of your entire retirement period, you can use a combination of several financial tools to provide the steady stream of retirement income you need to manage your finances effectively.

How to Turn Savings into Income

When looking for retirement income strategies, you have a few options:

• Social Security retirement benefits. This is one monthly retirement income strategy that most people rely on, but it may not be enough to cover your monthly costs. Use the Social Security Benefits Quick Calculator to see how much you can expect.
• Pensions. If you’re one of the lucky few with a true pension that provides guaranteed retirement income, consider yourself lucky. If the pension provides enough for your needs, you may not need another retirement income strategy. If it doesn’t provide enough, you’ll need to supplement it.
• Other retirement plans. You can turn your 401(k) or other defined contribution retirement plan into a stream of retirement income through a withdrawal strategy, such as the 4% rule or the more conservative 3% rule. However, the downside to this strategy is that the funds won’t last forever. The 4% rule is generally expected to make your funds last for 30 years, but if your retirement is longer than that, or if the market underperforms, you may run out of funds.
• Annuities. You can purchase an annuity to turn your savings into a retirement income stream. You pay a premium, and in exchange, you’ll receive a series of payments. There are many different types of annuities, all with different rules and levels of risk, but it’s possible to purchase an annuity to provide monthly payments for the rest of your life, or even for the lives of you and a spouse.

More Retirees Are Turning to Annuities for Retirement Income

As retirees face the risk of outliving their retirement savings, many are turning to annuities as a reliable source of retirement income.

According to Investopedia, annuities have become more popular as people deal with economic uncertainty, including stock market volatility, high interest rates and soaring inflation. As a record-breaking number of Americans reach retirement, demand for annuities is expected to remain high.

For many retirees, annuities can seem like the retirement planning solution they need. However, it’s important to choose your annuity carefully. Some annuities have variable crediting rates that leave your nest egg vulnerable to market downturns, as well as high fees that can reduce the amount you receive. You also need to consider how your annuity is structured, including whether payouts are deferred and how long your payouts will last. Annuities are not all the same.

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