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Make Annuities A Key Piece of Your Retirement Plan to Alleviate Worry

Many Americans are worried about financing their retirement.  Surprisingly, even those who have saved a wealth of money are concerned that they won’t be able to live they way they hoped for the rest of their lives.  In the Forbes article, “A Retirement Annuity Strategy That Offers Peace Of Mind,” Steve Parrish talks about how he convinced a friend of his that he would be just fine in retirement.  There are not any financial products that offer a magic potion for the perfect retirement.  But the author points out that the concept that most often works is using annuities as one of the key pieces in your retirement plan.  The friend in the article is actually in a great financial position with company stocks, a nest egg of savings and a large 401k.  He will be retiring at age 60 in just a few years and is a single widower.  He is not concerned that he hasn’t saved enough money to finance his retirement, but that he will spend his assets too quickly and risk outliving his savings.  The amount of wealth you have saved is a tangible thing, you either saved enough or you didn’t.  On the flip side, longevity risk is intangible because we don’t know how long we will live or how much money we will need.

An article in the Harvard Business Review pointed out that most people are worried about spending down their assets.  But when those assets are converted into income, the fear goes away.  We are used to spending our income throughout our lives, so spending your retirement income becomes the same thing.  The traditional 4% or 4.5% withdrawal strategy brings up two common concerns.  The first is running out of money before you die because your assets didn’t gain the expected returns in the markets.  The second is living so frugally that you end up having a plethora of money left over and feel shortchanged like you didn’t enjoy your retirement.  An annuity product alleviates both of those worries, whether you are concerned about the first or the second issue.

The economist who wrote the Harvard Business Review article says that worried retirees are not happy and suggests that the guaranteed income from annuities is a good way to make retirees comfortable and content.  When you know the income stream that you will be receiving, you don’t have to worry about spending down your assets over an uncertain time frame.  You can choose to buy an annuity that pays you immediately or defers the payments for years.  There is also the option to have your annuity income payments continue for the rest of your life or for a certain period of time.  Whichever decision you make, your annuity can take away many of your retirement fears and concerns.

Four annuity strategies that could work for the author’s friend are discussed in the Forbes article.  He could ladder the purchase of annuity products to maximize the potential for interest rate increases.  Payments can be made yearly to a deferred annuity that will start paying income when the person needs it.  You can also ladder your annuity payments so that you receive different amounts of income for different periods of your retirement.  You can plan to receive more income at the start of retirement when you might want to travel or be more active out and about.  Then you can purchase an annuity that starts ten years after retirement and pays less income for the time of your life where you might be happy to take it slow and relax more.  A third possibility for using annuities is for a health care safety net.  Using a deferred income annuity that pays a larger income later in life can help take away the fears of high health care costs and long term care expenses when you are much older.  In addition to your savings, there are other assets you can use to purchase an annuity.  You can make a 401k annuity transfer, transfer a Roth IRA or even use a life insurance policy to buy an annuity if you don’t need the death benefits any longer.  Annuities are a great way to take away the worry and stress of creating an income stream in retirement.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

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