Our parents and grandparents retired in a different world than we currently live in. Support of annuities a few decades ago was much lower than it is today. The negative view on annuities started with the government and worked its way down to the people. According to the Cincinnati Enquirer’s J. Brendan Ryan, “As life expectancy grows, annuities gain supporters.” One of the biggest complaints people had about annuities was that you were “wasting” money on the tax-deferred benefits of an annuity when your retirement plan was already tax-sheltered. People just didn’t realize that the tax benefits of annuities don’t cost any more money. They are built into the design of annuity products, so there is no “paying” for tax benefits that you don’t need. Of course, the biggest thing that people overlooked a few decades ago in regards to annuities is that their guaranteed income stream is necessary for the future.
Although the Government Accountability Office used to be critical of annuity products, they now recommend them as part of a balanced retirement plan. They studied retirement plans in other countries and also asked for information from the American public over the past few years. The three ways to pay out from retirement plans are by a lump sum distribution, a systematic withdrawal, or using an annuity. The annuity is only way to guarantee that you won’t run out of money in retirement. Since we don’t know how long we will live, taking a lump sum distribution or a systematic withdrawal of say, 4% yearly, does not guarantee that your money will last as long as you live.
The Government Accountability Office’s report found that annuities are even more important now for two reasons. The first is that longevity risk has greatly increased along with our life expectancies. The second reason is that there has been a nationwide shift from employer defined-benefit pension plans that worked like annuities to defined-contribution plans that simply accumulate money. The GAO also found that not only do annuities help to keep you from overspending in retirement, they also keep you from underspending. Those without annuities often hoard their money because they are worried about spending too much of it. When you have the comfort of knowing that you will not outlive your savings, you can spend your monthly annuity funds without worry. In the GAO report, they also mentioned a recent finding by the Society of Actuaries. Spreading out longevity risk over a large number of retirees, through purchasing an annuity, is the best way to guarantee lifetime income. Otherwise, you would have to substantially increase your retirement savings and would still not have any guarantees.
Written by Rachel Summit