As retirement approaches, one of the primary concerns for many pre-retirees is maintaining their current lifestyle without the fear of running out of money. According to a 2017 Nationwide Retirement Institute survey, many pre-retirees are less focused on growing their assets and more concerned with drawing them down in a disciplined manner. This shift in focus often leads to moving assets from high-risk investments to more stable, income-oriented vehicles. In this context, annuities have become a popular option for securing a reliable income stream in retirement. This article will explore how annuities can help you achieve a steady income during retirement, the benefits they offer, and important considerations to keep in mind.
1. The Growing Concern: Maintaining Lifestyle During Retirement
The 2017 Nationwide Retirement Institute survey highlighted a significant shift in the mindset of pre-retirees. Many are now more concerned with ensuring they can maintain their lifestyle during retirement rather than continuing to grow their assets. The fear of outliving their savings has led many to seek strategies that provide a stable and predictable income. This often means transferring assets from high-risk investments, such as stocks, into more secure, income-generating options like annuities.
An annuity is a financial product designed to provide a guaranteed income stream, making it an appealing solution for those who want to ensure they won’t run out of money in retirement. By converting a portion of your retirement savings into an annuity, you can create a personal income stream that lasts as long as you need it.
2. Annuities as a Solution for Steady Retirement Income
An annuity works by allowing you to invest a lump sum of money in exchange for a series of payments that begin either immediately or at some point in the future. The amount you invest in the annuity will depend on how much income you want to receive during retirement.
For example, if you want to ensure that you have a certain amount of income each month in addition to your Social Security benefits, you can calculate how much you need to invest in an annuity to achieve that goal. This process allows you to plan your retirement income with greater precision and confidence.
However, it’s important to remember that annuities are long-term financial products. They may come with fees, surrender charges, and specific holding periods, which can vary depending on the company and the type of annuity. Because of the complexity involved, it’s advisable to work with an experienced financial advisor who can help you determine which type of annuity contract best suits your needs.
3. Customizing Your Annuity: Features and Benefits
One of the advantages of today’s annuities is the wide range of features and benefits they offer, allowing you to customize your income stream according to your specific needs. Many annuities come with optional riders that can provide additional benefits, such as payout options for terminal illness, chronic care, disability, and even unemployment. These riders can offer peace of mind by ensuring that you have financial support in various life situations.
For example, a rider might guarantee that you receive your premium back if you need to access the funds earlier than expected. Another rider might allow you to continue receiving income even if you become disabled or unable to work. However, it’s important to note that these riders typically require an additional fee and may not be available on all annuity products.
Another way to benefit from an annuity is to use it as a wealth-transfer vehicle. Fixed annuity income is not taxed until it is distributed, which can provide a tax-efficient way to pass on wealth to your loved ones. For instance, you can preselect a payment stream for a beneficiary, allowing them to receive income over time rather than as a lump-sum payment, potentially reducing their tax liability. For more on this, see Rich Lane's article in Insurance News Net.
4. Insights from Recent Annuity Studies
The popularity of annuities among pre-retirees and retirees is reflected in recent studies. According to the LIMRA Secure Retirement Institute’s 2017 Annuity Buyers Metrics study, annuities appeal to individuals who are looking to achieve three major retirement income goals: asset accumulation, preservation of principal, and predictable retirement income.
The study found that people typically purchase a guaranteed income annuity at or near retirement when they have reached the peak of their income years or have accumulated significant assets. Additionally, the study revealed that 80% of retiree households with an annual income of at least $35,000 and who own an annuity have more than $100,000 in investable assets. This underscores the role annuities play in providing financial security and peace of mind during retirement.
5. The Importance of Financial Strength and Guarantees
It’s essential to understand that annuities are insurance products, and the income stream they provide is guaranteed by the financial strength of the issuing insurer, not by the government. This means that the reliability of your annuity payments depends on the solvency of the insurance company that issued the annuity. Therefore, it’s crucial to thoroughly research the financial strength and reputation of the insurer before purchasing an annuity.
Working with a financial advisor can help you evaluate the financial stability of the insurer and choose an annuity that aligns with your retirement goals. Additionally, your advisor can guide you through the various features and riders available, ensuring that you select the options that best meet your needs.
Conclusion
Annuities offer a reliable and customizable solution for generating income in retirement, helping you maintain your lifestyle and achieve financial security. Whether you’re looking to preserve your principal, ensure a steady income stream, or manage your tax liabilities for wealth transfer, annuities can play a crucial role in your retirement income strategy.
However, because annuities are complex financial products, it’s important to consult with a financial advisor to determine if an annuity is appropriate for your situation. By carefully evaluating your needs and the options available, you can create a retirement income plan that provides peace of mind and long-term financial stability.
If you’re interested in exploring how an annuity might fit into your retirement plan, schedule a consultation with us today. We’re here to help you navigate the complexities of retirement planning and ensure that your financial future is secure.