Key Takeaways
- Annuities can create a guaranteed lifetime income for retirees, relieving worries that you will run out of money during your lifetime.
- Annuities create a personalized financial plan that can help cover retirement expenses and provide peace of mind.
- Deferred and immediate fixed annuities, as well as variable annuities with a guaranteed lifetime withdrawal benefit rider, offer retirement income and future financial growth options.
Guaranteed Retirement Income
Annuities offer guaranteed retirement income by creating a contract with an insurance company. In exchange for a lump sum — typically from your retirement savings — an insurance company guarantees an income stream for a specified period or your entire life.
The lifetime income feature ensures steady payments, protecting you against the risk of outliving your savings. Payments are calculated based on factors like your age and gender.
About 43% of Americans fear they will outlive their retirement savings, according to a Northwestern Mutual survey. Annuities present a personalized financial plan — as well as investment in peace of mind and financial security — to avoid this fear.
“I know I could have made more money in the market, but you never know that,” Chuck Burton, an annuity owner and retiree, told Annuity.org. “But I just wanted to sleep at night. So that’s why I got into doing an annuity.”
Annuities provide a critical commodity for retirees: guaranteed income. Advisors often recommend covering essential expenses with such income sources, alleviating concerns about crucial living costs. While many retirees achieve this through Social Security, annuities can serve as supplementary income for those who cannot rely solely on it.
For couples anticipating outliving a partner, annuities offer valuable income security. The potential loss of Social Security income in retirement is a destabilizing event, both emotionally and financially. By having the backstop of guaranteed income or the option to activate it, retirees can mitigate this financial risk without heavy reliance on invested assets.
Stephen Kates, CFP®, Licensed Life Insurance ProducerPrincipal Financial Analyst for Annuity.orgStephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.
How Much Retirement Income Will You Need From an Annuity
An “income flooring” strategy can help determine exactly how much retirement income you’ll need from an annuity.
“You figure out what are all the expenses that you absolutely have to have,” financial advisor Chip Stapleton told the Annuity.org Podcast. “So that’s housing, that’s medical cost, that’s food, those things that you absolutely have to do, month in, month out — and you develop a number.”
Let’s say that number comes to $60,000. The next step is to determine how much Social Security you will receive. Also, add in all other sources of retirement income. Let’s say that adds up to $40,000.
You’re left with a $20,000 income gap.
- Income Floor: $60,000
- Combined Retirement Income: $40,000
- Income Gap: $20,000
$60,000 – $40,000 = $20,000
You then buy an annuity that’s large enough to cover that gap. You can use an annuity calculator to see how much it will cost to cover the gap.
“So, all of your needs, your basic needs, are taken care of on a guaranteed basis,” Stapleton said. “And then anything above that, you can use for your wants and your desires and hobbies and have fun in retirement.”
What Are the Best Annuities for Retirement Income?
Two of the best annuities for retirement income are immediate fixed annuities and variable annuities with a guaranteed lifetime withdrawal benefit (GLWB). Both protect your retirement income stream. In addition, consider a deferred annuity if you want additional income late in retirement.
Immediate Annuities
Immediate fixed annuities return the maximum amount of guaranteed income for the cost. You make a single, lump-sum premium payment — usually a portion of your retirement savings. In return, the annuity provider pays you a consistent income for life or for a specific amount of time.
Variable Annuity With GLWB
Variable annuities fluctuate with changes in the market. A GLWB is a rider you can add onto a variable annuity that guarantees a minimum payout even if the market drops and reduces the value of your variable annuity.
Most GLWBs will also let you withdraw from the cash value of your annuity when you need to.
Fees can be high on a variable annuity with a GLWB. Consumers should seek to understand how the cap works and how the fees are levied.
Deferred Annuities
Deferred annuities grow over time, which can be helpful for retirees who want to invest now and receive a payout in the future. Having it pay out in the future can provide extra cash late in your retirement to cover long-term care costs or other medical expenses as you age.
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Alternatives to Annuities for Guaranteed Retirement Income
Beyond pensions and Social Security, only a few alternatives to annuities offer guaranteed lifetime income. It’s essential to note that each option has its advantages and risks.
According to the Center on Budget and Policy Priorities, Social Security will only cover about 37% of your working income. And private pensions are rare these days.
“With pensions going by the wayside, annuities — private annuities — kind of filled that void for a lot of American workers,” James Philpot, director of the Financial Planning Program at Missouri State University, told the Annuity.org Podcast.
There are a few alternatives to consider for retirement income.
- Systematic Withdrawal Plans
- While not a traditional guaranteed retirement income source, systematic withdrawal plans allow you to set up pre-planned disbursements from an investment portfolio, such as your 401(k) or other retirement account. With careful planning, you can structure the withdrawals to last a lifetime.
- Certificates of Deposit (CD) Ladders
- By staggering maturity dates, you can engineer a CD ladder for a retirement income stream. You can take cash out or reinvest the money as each CD matures. But you are more likely to be at the mercy of interest rate fluctuations than with an immediate fixed-rate annuity.
- Treasury Bonds
- While not explicitly designed for retirement income, Treasury bonds are considered relatively safe investments offering a steady return. They can be part of a diversified retirement income strategy.
- Dividend-Paying Stocks
- Dividend-paying stocks do not provide a guaranteed income stream. However, companies with a history of consistent dividends may be considered for their retirement income potential.
- Managed Payout Funds
- Some mutual funds and ETFs aim to provide regular payouts but do not guarantee retirement income. They provide income and capital appreciation.
Retirement Income Alternatives
Read More: Are Multiple Annuities a Good Idea?
Consulting a financial advisor allows you to customize your retirement income plan to suit your unique needs, risk tolerance and financial objectives.
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