Creating Lifetime Income: How to Build a Retirement Income That Can Last
Saving for retirement is only half of the equation.
During your working years, the primary goal is often to accumulate money through a 401(k), IRA, investments, savings, or other financial accounts. But once you retire, the question changes:
How do you turn those savings into income that can potentially last for the rest of your life?
Creating lifetime income is one of the most important parts of retirement planning. The goal is to develop a strategy that provides enough predictable income to cover your needs while also allowing your remaining assets to support growth, flexibility, emergencies, and other financial goals.
For some retirees, annuities can be one tool for creating a lifetime income stream.
What Is Lifetime Income?
Lifetime income is income designed to continue for as long as you live, according to the terms of the applicable retirement or insurance product.
Potential sources of lifetime or long-lasting retirement income can include:
Social Security
Traditional pensions
Annuities
Investment portfolios
Retirement accounts
Rental income
Business income
Other assets
Not every source provides a contractual lifetime guarantee.
For example, investment withdrawals can continue only as long as the underlying assets are sufficient. Certain annuity contracts, on the other hand, may provide contractual income for life.
Understanding the difference is important when building a retirement strategy.
Why Is Lifetime Income Important?
One of the biggest challenges in retirement is longevity risk.
Longevity risk is the possibility that you live longer than expected and eventually run out of money.
This is a unique risk because living a long life is generally a positive thing—but financially, it means your savings may need to support you for many more years.
Someone who retires at 65 may potentially need income for several decades.
Creating a lifetime income strategy can help reduce the risk of relying entirely on a finite pool of savings.
Start With Your Essential Expenses
Before deciding how much lifetime income you need, estimate your retirement expenses.
Start with the costs you expect to pay regardless of market conditions.
These might include:
Mortgage or rent
Utilities
Food
Healthcare
Insurance
Property taxes
Transportation
Basic household expenses
Debt payments
Then estimate discretionary expenses such as:
Travel
Dining
Entertainment
Hobbies
Gifts
Major purchases
This creates a clearer picture of how much income you'll actually need.
Determine How Much Income You Already Have
Next, identify your existing retirement income.
For many retirees, Social Security will provide an important foundation.
You may also have:
Pension income
Rental income
Business income
Investment income
Retirement account withdrawals
Other recurring income
Subtract your expected reliable income from your estimated essential expenses.
The difference represents the potential income gap your retirement strategy needs to address.
Example of a Lifetime Income Gap
Imagine a retiree expects to need $6,000 per month to cover essential and lifestyle expenses.
They receive:
$2,800 from Social Security
$1,200 from a pension
That provides $4,000 of relatively predictable monthly income.
There is therefore a $2,000 monthly gap.
The retiree could potentially address that gap through investment withdrawals, additional savings, part-time income, an annuity, or a combination of strategies.
The exact solution depends on the individual's financial circumstances.
Using Annuities to Create Lifetime Income
Certain annuities can be designed to provide income for life.
You generally provide money to an insurance company, and in exchange, the contract provides benefits according to its terms.
Depending on the annuity, income can potentially begin immediately or at a future date.
Some contracts provide a lifetime income option, while others may offer optional income benefits or riders.
The specific guarantee depends on the contract and the financial strength and claims-paying ability of the issuing insurance company.
Immediate Annuities
An immediate annuity can be used to convert a lump sum into a stream of income.
For example, a retiree might use a portion of their retirement savings to purchase an immediate annuity.
The contract could then provide regular payments according to the selected payout option.
The amount of income depends on factors such as:
Age
Amount invested
Interest rates
Payout option
Single or joint lifetime coverage
Contract terms
An immediate annuity may appeal to someone who is already retired and wants to establish predictable income relatively quickly.
Deferred Annuities
Deferred annuities are generally designed to provide a period of accumulation before income begins.
Someone who is still working might use a deferred annuity to prepare for future retirement income.
Certain contracts may also offer optional income benefits designed to provide lifetime income later.
However, these benefits can involve additional costs and specific conditions.
Understanding how the income benefit is calculated is essential.
Single-Life vs. Joint-Life Income
If you're married, one important decision is whether income should cover one person or both spouses.
A single-life income option is generally designed to provide income based on one person's lifetime.
A joint-life option can continue income for both spouses according to the contract.
Joint-life income can provide additional protection for the surviving spouse, but the initial income amount may be lower than a comparable single-life option.
The choice depends on your household's needs and financial priorities.
Lifetime Income and Inflation
Creating lifetime income doesn't automatically solve every retirement risk.
Inflation can reduce purchasing power over time.
For example, $4,000 per month may cover your expenses today, but that same amount may not provide the same purchasing power decades from now.
Some retirement products offer increasing income features, while other retirees may use investments to provide growth that can help address inflation.
A retirement plan should consider both income stability and purchasing power.
Keep Some Money Liquid
Creating lifetime income doesn't necessarily mean putting all your retirement savings into an annuity.
Liquidity remains important.
You may need accessible money for:
Emergencies
Home repairs
Medical expenses
Vehicle purchases
Travel
Family assistance
Other unexpected costs
Maintaining savings and investments outside of an income-producing annuity can provide flexibility.
Lifetime Income vs. Investment Withdrawals
Another approach to retirement income is withdrawing money from an investment portfolio.
For example, a retiree might withdraw a percentage of their portfolio each year.
This strategy provides flexibility and allows continued market participation, but it doesn't provide the same type of contractual lifetime guarantee as certain annuity products.
Investment portfolios can decline during market downturns.
If significant withdrawals occur while markets are falling, retirees can face sequence-of-returns risk, which can negatively affect how long their savings last.
Some retirees therefore choose to combine investment withdrawals with guaranteed income.
A Combination Approach
You don't necessarily have to choose between investments and lifetime income.
A diversified retirement income strategy might include:
Social Security: A foundational source of retirement income.
Pension: Income for those who have access to one.
Annuity: Potential contractual lifetime income.
Investments: Growth potential and flexibility.
Cash savings: Emergency liquidity.
This approach can allow different financial resources to serve different purposes.
What About Legacy Planning?
Lifetime income planning can also affect what you leave behind.
Some annuity income options provide payments for life but may provide limited or no remaining value to beneficiaries after the annuitant dies.
Other products or contract options may provide death benefits or remaining account values.
If leaving money to children or other beneficiaries is important to you, understand exactly what happens to the assets when you die.
Your retirement income strategy should consider both your lifetime needs and your legacy goals.
Questions to Ask Before Creating Lifetime Income
Before purchasing an annuity or making a major retirement income decision, consider:
How much monthly income do I need?
How much income will Social Security provide?
Do I have a pension?
How large is my retirement portfolio?
How much income do I need guaranteed?
How much liquidity do I need?
What happens if I live much longer than expected?
What happens to my spouse if I die first?
What happens to my beneficiaries?
How will inflation affect my income?
What fees or surrender charges apply?
How financially strong is the insurance company?
How does this strategy fit with my overall retirement plan?
The Bottom Line
Creating lifetime income is about more than simply generating a monthly payment.
It's about designing a retirement strategy that addresses longevity, essential expenses, inflation, market risk, liquidity, spouse protection, and legacy goals.
Annuities can be one potential tool for creating contractual lifetime income, while Social Security, pensions, investments, savings, and other assets can provide additional sources of financial support.
The right strategy will look different for every retiree.
The goal isn't necessarily to guarantee every dollar of your retirement income. It's to make sure the expenses that matter most can be supported for as long as you need them.
With thoughtful planning, you can turn the savings you've accumulated during your working years into a retirement income strategy designed to provide greater predictability, flexibility, and confidence throughout retirement.