Certified Safe Money Admin
Certified Safe Money Admin
Benefit of Annuities – Should an Annuity Be Part of Your Income Strategy?
Planning ahead for the ideal retirement requires you to have several key components that all fit together and work congruently. One of the most important of these is income generation. Without a reliable income stream to “replace” your employer’s paycheck, you may not be able to attain your desired lifestyle.
That’s why adding income-producing financial tools like annuities is essential. An annuity can provide you with a reliable stream of income for a set amount of time, such as 10 or 20 years, or even for the remainder of your lifetime (no matter how long that may be).
An annuity can also allow you to generate tax-deferred gains, meaning that no tax is due on the growth until the time of withdrawal in the future. But it is important to note that not all annuities are the same. So, you first need to determine which type of annuity – if any – is best for you and your specific retirement goals and objectives.
How Sure Are You About Having Enough Income in Retirement?
Are you sure that you will have enough income in retirement? According to the Employee Benefit Research Institute (EBRI) 2020 Retirement Confidence Survey, only 27% of American workers feel “very confident” about maintaining enough cash flow in retirement, and only 7 in 10 workers feel “confident.”
One of the biggest concerns on the minds of retirees and those who are planning for this time in their lives is knowing that they won’t run out of income when they need it the most.
Just some of the factors that could impact the amount of net spendable income you have available in retirement include the following:
- Taxes – Most people are subject to taxes throughout their lifetime. For instance, wages and other income is typically taxable. Taxes are also usually incurred on items and services that are purchased. There are even some people who are subject to estate tax when they pass away. Likewise, taxes don’t disappear when you retire. In fact, while some financial advisors state that individuals will be in a lower income tax bracket in retirement, that is not necessarily always the case. There can be many taxable retirement income sources, such as funds generated from traditional IRAs and retirement plans. Similarly, interest and dividends that are generated from various investments may also be taxed. And, in some cases, Social Security income benefits could be taxable, too. So, it is essential to factor in taxes when determining the amount of actual spendable income you will have in the future.
- Debt – Having a large amount of debt can also cause financial issues in retirement. This is particularly the case with high-interest debt like credit card balances. In this case, the more debt you have, the less income you will have available for your monthly living expenses during retirement. It stands to reason, then, that the ERBI survey found that the more debt a worker has to pay off, the less confident they are about attaining financial security in retirement.
Worker Confidence in Financial Security in Retirement, by Debt
Overall, how confident are you that you (and your spouse) will have enough money to live comfortably throughout your retirement years?
Source: Employee Benefit Research Institute (EBRI) and Greenwald & Associates, 2020 Retirement Confidence Survey.
Why You Should Consider an Annuity as Part of Your Retirement Income Strategy
The EBRI states that “retirement confidence continues to be strongly related to retirement plan participation, whether in a defined contribution plan, defined benefit plan, or individual retirement account (IRA).”
Even so, it is important to keep in mind that a successful retirement has much more to do with reliable and ongoing income generation than it does with asset value or overall net worth. Because of that, one financial tool that many retirees turn to for reliable lifetime income is the annuity.
How Annuities Can Make Retirement Income Planning Much Easier
There are many different ways to create an income plan in retirement. The more “traditional” strategies rely on “drawing down” a certain amount of money from a portfolio to use towards living expenses each year (or each month) while leaving the remainder of the funds in the account to keep growing.
In the past, the “4% Rule” was a popular income generation strategy. Using a portfolio that consisted of roughly 50% stocks and 50% bonds, retirees could oftentimes rely on income for the remainder of their lives.
But given today’s volatile stock market, coupled with historically low-interest rates, the 4% Rule is no longer a valid income-generation strategy – and going this route could cause a retiree to run out of money.
This is why more retirees today are using annuities in their retirement income planning. These financial vehicles are designed for providing a regular stream of income for a certain amount of time, or even for the remainder of the annuitant’s (i.e., the income recipient’s) life.
Because of this reliable stream of ongoing income, retirees can feel much more confident that their living expenses will be covered. And in many instances, knowing that they do not have to worry about running out of income, retirees can remain stress-free and ultimately have a much more enjoyable retirement.
Is an Annuity Right for You?
While annuities can offer a long list of benefits – both before and after retirement – these financial tools can also come with a lot of “moving parts.” Because of that, it is recommended that you first discuss your goals, as well as your risk tolerance and time frame, with a retirement income planning professional. That way, you will be able to narrow down which annuity may fit your needs.