American playwright Tennessee Williams once famously said, "You can be young without money, but you can’t be old without it.” If the thought of your retirement income running out before you do leaves you feeling like a cat on a hot tin roof, you should know there are options for guaranteed monthly income—for the rest of your life.
How Long Will I Need Income?
According to Social Security Administration data, the average man who reaches 65 today can expect to live until just past 84 years old, while a woman will live even longer—almost 87 years. This means that about half the population will likely live even longer. In fact, the data shows that one out of every four Americans who is 65 today will live past 90, and one in 10 will live beyond 95!
While other financial products may claim your money could last a lifetime, fixed annuities guarantee—in a written contract—that you will be paid income for your lifetime, no matter how long that may be (and hopefully it is long).
Annuities can offer you dependable, lifetime income during your retirement years. A fixed annuity is especially effective because it guarantees income for life and protects your savings from market downturns. Here are some reasons why you may want to consider using a fixed annuity as part of a diversified retirement savings plan.
More Income Can Mean Greater Comfort
While wealthier Americans will probably enjoy a very comfortable retirement living off their significant investments, the rest of us rely on the retirement income we receive from Social Security and, for some, pensions—if you’re fortunate to have worked for a company that still offers them.
That’s where annuities come in. An annuity can provide that extra source of income for a retirement that’s financially stable and dependable.
The Appeal of Steady Income
Would you rather receive your retirement income all at once or a in steady stream? With a fixed annuity, you have the choice, and each comes with its own set of tax implications. With a lump sum, you get the income all at once, and therefore must pay the taxes due all at once. That’s why many retirees opt for a steady stream payout—either monthly, quarterly, or annually.
Scheduled payments can help lower your immediate tax load and can offer the guarantee of regular cash inflow. Knowing you’ll receive payouts on a regular basis makes it easier for you to budget year after year, for many years. You’ll know whether there’s enough money coming in to fix up your house, take a bucket-list vacation, or even assist with a grandchild’s college education.
When your money is protected with fixed annuities, you don’t have to worry about recovering money lost in risky investments.
Protecting Your Money is Critical
With some annuities, called variable annuities, you invest your savings indirectly in financial markets through the use of sub-accounts, which in turn invest in mutual funds. Your variable annuity can earn and lose money depending on the investment choices (sub-accounts) you make. When you lose money in a variable annuity, even if your rate of return increases, it takes longer to recover the money you lost. If you want to recover the losses faster, you may have to take even more risk to potentially get a higher return—along with the potential for greater losses as well.
Not so with fixed annuities. All fixed annuities guarantee your annuity value. Some fixed annuities, called fixed rate annuities, set a fixed interest rate that your annuity will earn. Other fixed annuities, called fixed indexed annuities, give you the opportunity to earn interest based on the positive performance of a market index, like the S&P 500 or Dow Jones Industrial Average, without ever being invested in the market. So, if the market index you select goes up on your annuity anniversary, your fixed indexed annuity can earn interest tied to its movement. If the market index goes down, you won’t lose any money due to market loss because your annuity value is protected.
When your money is protected with fixed annuities, you don’t have to worry about recovering money lost in risky investments. And when it’s time to take money out, your payments are guaranteed for life (or longer, if you choose to add benefits to extend payments to cover your spouse’s lifetime, too).
Make Sure Your Insurance Company is Strong
Because your annuity will likely extend over many years, it’s important to purchase your annuity from an insurance company that is financially stable, because the annuity guarantees are based on the company’s financial strength and claims-paying ability. There are various ways you can research a company’s financial strength. An easy way is to ask your state insurance department.
You can also visit the insurance company’s website, ask your financial professional for more information, or review a company’s rating from an independent rating agency. Four main firms currently rate insurance companies: A.M. Best Company, Standard and Poor’s Corporation, Moody’s Investors Service, and Fitch Ratings.
It’s easy to see why added funds and a steady, reliable stream of income can contribute to retirement satisfaction. Guaranteed, dependable income allows you to seize opportunities, enjoy time with your family, and cover the unexpected, knowing that you’ll be receiving income on a regular basis for as long as you live. To learn more about annuities, speak to a financial professional.
Annuities are long term financial products designed for retirement income and may not be suitable for everyone. They involve fees, expenses, and limitations, including surrender charges for early withdrawals. Some include optional riders and benefits that may come at additional cost. Annuity product and feature availability may vary by state.
Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company. With variable annuities, guarantees do not apply to the performance of the variable sub-accounts which fluctuate with market conditions. Withdrawals are subject to ordinary income tax, and if taken prior to age 59 ½ may be subject to an additional 10 percent federal penalty.
Investing involves risk, including possible loss of principal.