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Retirement Income is More Important than Leaving Money to Heirs

Steve Vernon has been writing about generating retirement income in a three part series for CBS Moneywatch.  In the third article, “Generate retirement income or leave a legacy?,” he questions whether retirees can actually do both and which is more important.  You cannot do both with the same investment, unless you are sacrificing some of the investment’s benefits.  The best way to both generate retirement income and leave a legacy to your heirs is by diversifying your retirement plan and using multiple investment strategies.  But what if you have to choose between the two?  The Stanford Center on Longevity and the Society of Actuaries answered this question and many others in their recent study titled “The Next Evolution in Defined Contribution Retirement Plan Design.”  You need to focus on generating retirement income for yourself in the best way rather than worry about what you are going to leave to your heirs.

In his first post on this topic, Mr. Vernon compared annuities and other retirement income generators.  He showed how much income you will receive in retirement based on the type of product you use.  His second post compared the same products in both a worst case and best case scenario in the future.  When economic conditions are less favorable, annuities generate the most income.  On the other hand, other investments generate higher income when conditions are favorable.  It is important to most people that they protect themselves in case markets take a downturn at retirement.  Annuities offer that kind of protection and ensure that you won’t run out of money, regardless of what happens in the financial markets.  Keeping money in different types of investments is also a good way to be protected in either market outcome.

The graph in this third post of Mr. Vernon’s shows the amount of income that you will have leftover from your retirement income generator at the end of thirty years.  The annuities used in the research for this article do not leave any money to heirs at the end of the thirty years.  Inflation-adjusted annuities and immediate fixed income annuities are typically designed so that you don’t leave money to heirs.  For an added cost, you can make sure that there are death benefits with most annuity products.  The annuity with guaranteed lifetime withdrawal benefits (GLWB) actually runs out of money after 28 years in this example, but continues to pay you until you die.  These also do not leave money to your heirs.  The retirement income generators that pay you the lowest amount of income in retirement leave the most money to heirs in the end.  You might be better off by generating higher income for your retirement years and putting money for your heirs elsewhere, if you have it.

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