By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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Increasing life expectancies should be considered in retirement planning to be sure you do not outlive your income stream. Consider that a 65-year-old couple has an 89%* chance that one partner will live to age 85 and a 45% chance that one will live to at least age 95. This means many people could be looking at 30 years or more in retirement. It’s no surprise, then, that nearly three-quarters of Americans (72%)** say having a source of guaranteed monthly income in retirement beyond Social Security is important to them. The reality is that there are only three sources of guaranteed income in retirement: Social Security, a pension and an annuity.
Social Security is the most known form of guaranteed income in retirement. Social Security benefits are typically based on how many years a person worked, how much they earned, and how much they have contributed to the program during their working years. Usually this is not near enough income to provide a comfortable retirement. As of December 2023, the average monthly Social Security check is $1,767, according to the Social Security Administration.
If you are lucky enough to have a pension, this could provide an additional supplemental lifetime income stream. Unfortunately, these days, pensions exist almost solely in the government sector. So, if you do not work for a government entity, it is likely that you will not benefit from a pension. Accordingly, if you want an additional lifetime income stream, an annuity is the only real option.
Annuities are contracts issued by insurance companies and come in distinct types that can generate a guaranteed lifetime income stream. Deferred annuities delay access to income for a certain number of years, while an immediate annuity starts income shortly after a policy is placed in force. There are several distinct types of annuities available today, all of which include the opportunity for guaranteed lifetime income through standard or optional benefits.
- Income Annuities can offer a strong lifetime income guarantee for a single premium. Generally, the income guarantees in this product type are stronger than other types, as these products have no liquidity.
- Fixed Annuities offer a guaranteed rate of return over a set period of time. This offers a high level of predictability given returns are not tied to or impacted by the stock market.
- Index Annuities provide interest that is partially based on the performance of a market index, such as the Standard & Poor’s 500 Index, without the risk of loss of premium due to market downturns or fluctuations.
- Variable Annuities offer returns that are tied to professionally managed investment portfolios (variable investment options) that may include stocks, bonds or a combination of investments.
Regardless of the type of annuity purchased, they can be structured to provide a person a guaranteed income for life—no matter how long they live.
Lifetime Income Gives Flexibility
Some investors believe that purchasing an annuity eliminates investment flexibility. Although it is true that a substantial annuity deposit will have to be made, this type of purchase could provide additional investment flexibility in investing your other retirement assets. If you do not purchase a lifetime income annuity, generally investors are inclined to invest more conservatively than they otherwise might to protect from an inevitable stock market decline. If your retirement income is guaranteed for life and protected from the ups and downs in the market, you can take more risk and weather the volatility. In addition, you might also feel more comfortable taking larger withdrawals to spend from your portfolio if you have the lifetime income stream in place. Contact a financial advisor today for more information about annuities that may fit into your plans.
*Insured Retirement Institute (IRI), IRI Retirement Fact Book, 2022, based on data from the American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator (accessed 10/13/21). Assumes a male/female couple.
**2023 Corebridge Survey on Retirement and Longevity
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.