How to Generate Retirement Income Through Annuities
One of the biggest fears most retirees have is outliving their money; three-quarters of Americans are worried about having enough money for retirement, according to a 2014 Harris Poll, which also found that three out of 10 Americans are not saving for later years. Those in or near retirement have plenty of reason to be concerned: the median income of people age 65 and older who are fully retired was $18,096 in 2014—just $6,000 above the 2015 U.S. Health & Human Services’ poverty line for an individual.
The average retired worker receives only $1,336 per month in Social Security benefits, according to the Social Security Administration. As a result, more and more retirees are returning to the workforce to supplement their income. But there is another option that you should seriously consider—generating a steady retirement income through annuities.
What is an annuity?
Often overlooked as a potential income source, annuities are a type of insurance product that you pay for upfront and which provides income for a defined period, typically 10-15 years or until the end of your life. Depending on the annuity structure, you can receive payments on a weekly, monthly, or annual basis. What you pay for the annuity depends on the company you work with, the rate of return they provide, the number of years between payment and retirement, and the specific annuity structure you choose. There are two kinds of annuities: fixed rate and variable rate. For the purpose of this article, we’ll focus on fixed-rate products.
In a fixed rate annuity, the life insurance company that issues the annuity agrees to pay a fixed rate of income for the term of the payout. When you begin withdrawing income from a fixed annuity, the amount you receive is determined by a combination of the account’s value and the payout term.
Why choose annuities for retirement income?
In addition to a steady income, fixed-rate annuities offer a guaranteed rate of return, tax-deferred growth, and lower risk than many other investment options. Let me break it down for you.
- Rates of Return: In a fixed rate annuity, the life insurance company that issues the annuity agrees to pay a fixed rate of income for the term of the payout. When you begin withdrawing income from a fixed annuity, the amount you receive is determined by a combination of the account’s value and the payout term.
- Tax-deferred growth: Maximizing your investment with tax-deferred growth is one of the biggest benefits of choosing an annuity in retirement. Earned interest is tax-deferred, allowing your investment to grow at a faster rate. You pay taxes only on any interest the annuity earns after you start withdrawing income from it.
- Access to your funds: Unlike many investment products, annuities have a built-in provision that allows you to withdraw a portion of your money every year, often about 10% of the account value. Many allow you to withdraw any interest earned each month. There are other contract provisions that enable you to access everything in the annuity if you are hospitalized, have a life-threatening illness, are subject to a permanent stay inside a nursing home, or suffer a major calamity that could affect you economically. You can also structure an annuity to pay out over a fixed term, which helps spread out any tax burden and provides an enhanced level of income security.
- Lower Risk: Many retirees also choose annuities because the principal and already credited interest of fixed and fixed index annuities are not subject to market risk. If you’re considering an annuity, check out the insurance company’s rating with an independent rating firm such as A.M. Best Company. Solid ratings often mean a more secure financial backbone.
Are annuities right for you?
Given the return rates, tax treatment, access to funds, and lower market risk, annuities are a smart choice for many retirees who want to build a safe, steady source of income in retirement. Need help sorting out your options? Let your professional advisor work with you to develop and prioritize your goals and see if an annuity is the right choice for your portfolio.