Considering retirement? Most people fear the very real possibility of outliving the money they’ve worked so hard to save.
Making sure your money lasts throughout your life is one of the main concerns when planning retirement. After all, you worked hard and saved your entire life. You shouldn’t have to worry about reducing your lifestyle.
Keeping your retirement properly funded remains an ongoing challenge. This holds true with the market volatility, economic uncertainty, and other concerns. On top of that, we’re living longer than we used to.
Company pension plans provide a steady income for life countered some of those risks. But, only a few are lucky to have one.
Today, pensions are disappearing from the American landscape. Only 26% of American workers have access to a defined-benefit pension plan, according to a Bureau of Labor Statistics survey in 2018.
How Annuities Give You Protected Monthly Income
But, there’s some good news. Even with the risks, concerns, and in the absence of a pension, you can get that kind of protected monthly income. You can get it by investing in an annuity.
“An annuity is the only financial product that can generate income that will last as long as someone may live, whether that is to age 80, 90, 100, or 110,” explains Frank O’Connor, vice president of research and outreach at the Insured Retirement Institute.
Annuities are long-term investments offered by insurance companies. They can provide this lifetime guarantee because they’re able to pool the risk among a wide range of individuals.
Other Annuity Benefits
“Setting aside part of your retirement savings into an annuity also helps you avoid a second issue associated with working with lump-sum investments,” says William G. Gale at the Brookings Institution think tank in Washington, D.C. He serves as the Arjay and Frances Miller Chair in Federal Economic Policy and Director of the Retirement Security Project.
Gale says, “If you drawdown your lump-sum savings too and live longer than you expected, you might have to rely on less in your later years.” Keep in mind, if you also drawdown your savings and pass away earlier than you expected, your thrift will have been unnecessary. You won’t have enjoyed your retirement years as much as you could have.
“Having part of your retirement assets in an annuity reduces these two risks,” Gale says. You can have a standard of living that’s higher than in the conservative drawdown case and rest assured your protected lifetime income will last as long as you do.
O’Connor believes that the temptation to overspend is greater when you see your savings as a lump sum. “Retirement savings will seem like a financial windfall at first,” says O’Connor. He states “using that ‘pot of gold’ without a plan creates a high likelihood of depleting those savings while you still need them.”
How to Plan Ahead with an Annuity
Annuities can also protect you from outliving your income in retirement. It decreases your need to make financial decisions late in life. “We’re all vulnerable to the challenges of old age,” says Jack Dolan, vice president of the American Council of Life Insurers.
Remember—not all annuities are alike. For example, some annuities provide a family benefit, beyond one person’s life. This could be a joint benefit or a death benefit.
Plus, your need for an annuity also depends on your other sources of retirement income, like Social Security or required minimum distributions from retirement plans. So check with a financial professional before investing in an annuity.
Ultimate Retirement Planning Goal
Whatever your asset mix is, all retirement planning comes down to one thing: being more secure. The protected lifetime income of an annuity can free you to focus less on financial concerns and more on enjoying your golden years to the fullest.
Annuities are long-term investments designed for retirement purposes. The value of variable annuities is subject to market risk and will fluctuate. Product guarantees are subject to the claims-paying ability of the issuing insurance company.
Earnings, when withdrawn, are subject to federal and/or state income tax, including a 10% tax penalty for withdrawals before age 59½. Some income guarantees offered with annuities take the form of optional riders and carry charges in addition to the fees and charges associated with annuity products.
There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Investments in annuity contracts may not be suitable for all investors.
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