You can turn part of your retirement savings into a paycheck for life. But it takes careful planning

By Jeanne Sahadi, CNN

(CNN) — If you’ve spent your career in the private sector, chances are you won’t get a pension in retirement.

Not having that steady paycheck can make retirees nervous about spending the money they’ve squirreled away, especially given that Social Security will replace only 40% of pre-retirement income on average.

But there are ways to convert part of your nest egg into a predictable income stream that, when coupled with Social Security, can cover your essential expenses in retirement.

Combating a common fear

Creating your own paycheck can spare you from the biggest fear for many retirees: running out of money before they die.

That’s because retirees have to manage their assets not knowing how long they’ll be healthy, how long they’ll live, how markets will perform and how high inflation will be.

The perennial stress of figuring out how much they can afford to withdraw can lead many to underspend in retirement. So, they live less well than they might and some die leaving a nest egg that is almost as large as, if not larger than, when they entered retirement.

In her upcoming book, “The Forever Paycheck: The New Retirement Strategy to Spend More, Worry Less and Never Run Out of Money,” Jean Chatzky cites a study that found retirees who hold a greater portion of their wealth in guaranteed income – such as that from a pension or annuity – spend more than retirees who hold the greatest share of their wealth in investments.

What’s more, the study’s authors noted: “Surveys reveal a clear preference among retirees to live off income and many don’t feel comfortable spending down assets to fund a lifestyle.”

Put another way, “if you structure your money so you have a paycheck, you’re going to be a lot more comfortable spending it,” said Chatzky, founder of personal finance site HerMoney.com.

Make your own pension

Once you have a sense of your spending needs and figure out how much income you’ll need on top of Social Security, you can set up a “paycheck” in multiple ways.

Chatzky’s book, which highlights the work of researcher Wade Pfau in creating a retirement income plan, lays out four income path strategies. The “right” choice comes down to how much market risk you’re willing to take versus how much income certainty you want.

For those most interested in income protection, one approach is to set up part of your nest egg to produce a predictable amount of income every year through interest-bearing bonds and certificates of deposit. But that requires you to be somewhat proactive or pay someone else to do it for you.

Another approach involves annuitizing a portion of your savings, which can ensure predictable income but also places limits on your ability to get any remaining money out.

What annuities do

Annuities are not for everyone. Many financial experts note they can be complex, expensive and a potential rip-off if you’re directed to a product that is unsuitable for your needs. But for people who know how risk tolerant they are and who do their research, annuities may be helpful.

Across the three main types of annuities — fixed, variable and fixed index — the income from each can be either immediate or deferred. (Annuity.org offers helpful guides about the different types and what to consider before buying one.)

There are also a variety of add-on options: Do you want inflation-adjusted payments? Do you want to be paid for life or just over a decade or two? Do you want the annuity to have a survivor benefit? The list goes on.

The more add-ons you choose, the lower your guaranteed paychecks will be. For example, a $500,000 single premium immediate annuity (SPIA) offering a 6% interest rate would pay you a flat $30,000 annually until you die. But if you opt for inflation adjustments, your interest rate will be lower, thereby lowering your initial payments so they can grow over time with inflation, said Bryan Hodgens, head of research for LIMRA, a trade association for the insurance and related financial services industry.

None of it is simple. Both Hodgens and Chatzky recommend working with an accredited financial adviser who knows both your finances and your retirement goals to get the best guidance.

But don’t sign a contract before comparing offers from different insurers, Hodgens said. Also, ask how your adviser is being paid for any product recommended and only buy from reputable insurers that consistently get a top rating (A or higher) from places like A.M. Best, Moody’s or Standard and Poor’s, Hodgens said.

Chatzky said that because she is not a risk taker, she plans to buy an annuity with part of her nest egg.

“But there are some people who are not wired to match with this product,” she said. “That’s where the financial planner comes in: to help people figure out if this is the right solution. And if not, how can you get as close as possible (to creating a paycheck) without the guarantee?”

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