While investing a big portion of your retirement savings in the stock market can be a risky decision, putting some of that money into an annuity can help ensure you have a steady flow of income for life. There are downsides, but they can be a powerful tool for financial security in retirement – especially if you seek out some of the best annuities.
“We want to protect against the possibility of a very long life and that’s really what annuities are for,” says Alan Moore, certified financial planner with Serenity Financial Consulting LLC in Milwaukee, Wis. “Ultimately, annuities are for one thing: to provide income later on in life, late into retirement.”
Guaranteed lifetime income is especially important today as Americans are living longer and worrying more about outliving their retirement savings.
Roughly 85% of financial planners’ clients are kept awake at night due to worries about outliving their savings in retirement, according to a 2013 study by investment firm Principal Financial Group. A year prior, outliving retirement savings wasn’t even among clients’ top three concerns.
Purchasing an annuity can help settle your retirement worries. In fact, having an annuity can actually provide a boost of confidence in retirement planning, research shows.
Nearly half of retirees and pre-retirees who own annuities said having the product made them feel more confident in their ability to live a desired retirement lifestyle, according to a recent study by the LIMRA Secure Retirement Institute.
So what do you need to know about the product to make sure you won’t outlive your retirement income?
An annuity is an insurance product that pays out income. You make an investment in the annuity and then it makes payments to you, giving you a dependable income stream during retirement.
Annuities are often divided into two distinct categories – fixed and variable – and can also be deferred or immediate, meaning they begin paying out on a future date or payments can start right away.
Fixed annuities guarantee a certain base of income per month, unlike variable annuities, which depend on underlying investments.
A variety of different riders can be applied to all kinds of annuities, which make the product more complicated and more expensive, since fees are tacked on with every “guarantee.”
Because of this, the best kind of annuity is the simplest, Moore says.
“If I’m helping a client buy an annuity it’s going to be a fixed annuity with an inflation rider,” he says. “Other than that, that’s it – not a long-term care annuity, no riders, no guaranteed premiums.”
With all of the riders and guarantees stripped away, the classic annuity structure is a good option for pre-retirees or retirees looking for a way to make their money last.
“It’s appropriate for someone concerned about living too long and outliving their money,” says Michael Kitces, partner and director of research at Maryland-based Pinnacle Advisory Group. “Annuitizing your income or buying an annuity is a very efficient way you get a guaranteed lifetime income stream you cannot outlive.”
With the volatility of the stock market, there has been more interest from retirees looking for ways they can get this type of guaranteed income.
But a good retirement income portfolio should consist of more than just annuities. A well-balanced and diversified portfolio provides the best retirement income stream, Kitces says.
Learn more about annuities to decide whether one might be right for you.
You might also want to assess how an annuity fits into your overall retirement plan. The NewRetirement Retirement Calculator enables you to see what happens to your retirement plan if you invest in an annuity. After inputting your current finances, you can “try on” an annuity and see what kind of impact the insurance has on your net worth, estate, and cash flow.
The retirement calculator will enable you to discover:
- If your money will last longer with an annuity.
- How the annuity impacts your estate.
- If you need more savings or less if you have an annuity.
- If the annuity helps your monthly cash flow.