Running out of money in retirement is one of Americans’ biggest concerns. They have good reason for this worry. Only 22% of workers in private companies have a pension from their employer that will pay them monthly income. Most of these pension recipients will get income payments for the rest of their lifetime. As lifetime expectancy approaches record highs, having guaranteed lifetime income is crucial to retirement planning. So what about all of those Americans who don’t have a company pension plan? How can they get guaranteed lifetime income in retirement? According to The Washington Post article, “After you’ve saved for retirement, annuities can help put your nest egg to work,” Rodney Brooks says that an annuity is one of the only substitutes for a pension.
Most of us haven’t saved enough to ensure a comfortable financial retirement without purchasing some type of annuity. Those who have diligently saved during their working years most likely have their money in a 401k plan or IRA. Whether your savings is large or small in these retirement plans, once you retire you have to make decisions to create your own income stream. Almost every financial planner and expert you ask will recommend putting some of your savings into an annuity to create your own pension income stream. The key word there is some of your savings. The money that you put into an annuity is not liquid during the surrender period, so you have to keep a portion of your savings available for emergencies and other investments.
Even with all of their benefits, the majority of Americans don’t purchase annuity products. TD Ameritrade’s director of retirement and annuities believes that these products are just misunderstood. People don’t realize that there are so many different types of annuities and typically lump the products into the same category. Some annuities function like a CD, others like a pension and still others are used to grow your money tax-deferred. When you buy an annuity, you enter into a contract with an insurance company where they pay you income monthly for a specified time period. Variable annuities invest your money and give you the potential to take advantage of market gains. Their fees can be higher than other annuity products though and there is the potential to lose money if markets go down. Fixed annuity products pay you a guaranteed rate of return based on current interest rates and don’t charge extra fees. Fixed indexed annuities are a combination of the first two types because they protect your principal but give you the opportunity to take advantage of market gains. Your gains are capped though. An immediate annuity is the simplest form where you pay a lump sum of money to an insurer in exchange for regular income that can last for your entire life. These annuities don’t charge any fees.
One expert says that you can think of annuity products like a reversed mortgage payment. Your principal and interest are paid back out to you. Many people use these products for tax deferral but they are also used for guaranteed lifetime income. Variable annuities are typically the products that receive the bad reputation when it comes to annuities because you risk losing some of your principal. Annuities are a good product for people who are looking for an income stream or want to receive some market exposure while also protecting their principal. Many investors are willing to be riskier with their remaining retirement savings after purchasing an annuity to create a guaranteed stream of income. Annuities are more flexible now than they were in the past. You can opt to add death benefits, joint survivor benefits and a host of other riders. Do your research to determine if an annuity is right for a portion of your retirement savings. Find a reputable insurance company with good finances and good customer service. If the benefits associated with an annuity match your retirement goals, find the annuity that works for you and guarantee an income stream to protect your retirement.
Written by Rachel Summit