Leveraging Annuities to Strengthen Your Retirement Strategy
For many people, the focus of retirement planning is to set aside money to build a nest egg for the future. But a true planning process takes in all of the goals and needs of a household to answer important questions. What are my sources of income in retirement? How do I take care of my loved ones when I’m gone? How do I balance risk and safety to meet my goals?
Most people get help from a financial professional to create and manage a plan, but it’s important for all investors to understand the basics of the challenges in retirement—and their solutions. Retirement itself is a shift from setting aside some of your paycheck to creating a new one. Whether you retire all at once or continue working part-time, you’ll need to decide how to make your savings work for you.
For years, many people have relied on regular withdrawals of money from their savings to supplement Social Security and/or a pension. Fewer retirees have a pension today while they’re living even longer, which means squeezing more out of those retirement savings. Taking income from a series of bonds, also known as a bond ladder, is a safe way to generate income. But low interest rates mean low income.
This is why so many financial professionals consider an annuity. Using annuities for retirement planning is very different from a traditional financial planning approach. So it’s important to understand how different kinds of annuities can fit into your plan depending on what you need and when. Each kind of annuity offers different features and benefits, so it’s important to understand what you need and how an annuity can help you achieve your goals.
We’re going to focus on two big reasons that people buy annuities: safe accumulation of interest and reliable income.
Safe Accumulation of Interest
If you’re not ready to put an income plan in place, fixed annuities can help grow your savings safely and prepare for income later. A fixed annuity falls in the “fixed income” category because it has a low-risk profile and provides a balance against higher-risk investments. This is especially important the closer you get to retirement, when you’ll start using your savings to replace your income.
At that time, it may make sense for you to shift to a strategy that “turns on” the guaranteed income power of the annuity, either within an annuity you already own or by exchanging it for a different annuity. Or it may make sense for you to continue the strategy where the annuity is part of your fixed income holdings, especially if you have other sources of guaranteed income. Either way, a fixed annuity gives you options down the road for safe accumulation of interest or guaranteed lifetime income.
Reliable Income – for a Lifetime
There are two ways to create a reliable income from annuities in retirement. First, some annuities offer an optional benefit that guarantees income for life. Second, you can convert the contract to a guaranteed income stream, also known as annuitization. You may want income to start right away, or you may be looking to start it in the future. Either way, income guarantees can improve your retirement income plan.
Risks in Retirement
There are three big risks that you face when you start using your retirement savings for income. Annuities can help with all of them.
- The risk of outliving your savings.
- The risk of reduced purchasing power in the future.
- The risk of market losses early in retirement that your portfolio may not recover from.
Boosting Your Retirement Success
There are many unknowns in retirement, but it is still important to make plans that will increase your chance of success. This is where a retirement plan that takes into account your goals and priorities comes in. We don’t know how long we are going to live, which makes it impossible to know how long our money will need to last. Even so, there are ways to measure how likely our plan will succeed while taking into consideration the three risks of retirement: market fluctuations, reduced purchasing power, and longevity. Using methods that test your plan through many scenarios, it’s possible to look at your risk of running out of money or the average amount of money you’d have left over.
Annuity Alliance can provide an insurance professional to discuss potential annuity options that align with your retirement planning goals. Contact Annuity Alliance for more information.
We are sharing this article as information only and should not be used to make a financial decision.