Why guaranteed income leads to more confident spending

Research from retirement expert Michael Finke, Ph.D., and fellow economist David Blanchett found that retirees who convert part of their savings into guaranteed lifetime income spend roughly twice as much each year as retirees who rely on savings alone.¹  

The reasoning is straightforward: when income is guaranteed, you don't have to calculate and recalculate how long your money needs to last every time you want to spend it. 

Having that income in place early appears to give retirees more confidence to spend, which can mean a more active, enjoyable lifestyle in the years when they're most able to enjoy it. Guaranteed income doesn't just support your budget, it changes how comfortable you feel using it. 

 

Why fewer retirees can count on market income alone

Just 14% of private-sector workers have access to a traditional pension today, down from levels that were already low a decade ago.² Without one, it falls to each retiree to figure out how much they can safely spend and how much risk they're willing to take with their savings, often without the confidence that guaranteed income provides. 

Bonds, CDs, and dividend-paying investments can provide some steady income, but that income has shrunk. The S&P 500's dividend yield sits near 1% today, one of its lowest points in more than a century.³ Decades ago, when yields regularly ran 3% to 4%, a $250,000 investment in an S&P 500 index fund could generate $7,500 to $10,000 a year in dividend income alone.⁴ At today's yield, that same $250,000 produces closer to $2,500 a year. 

That gap is where guaranteed income can make a meaningful difference for pre-retirees and retirees. 

 

What longevity risk means for your retirement spending 

One reason retirees hold back on spending is longevity risk — not knowing how many years their retirement savings need to last. Because that timeline is unknown, many retirees spend less than they could, simply to avoid running out of money later. 

A fixed index annuity (FIA) is one of the few financial vehicles that can address that uncertainty directly. An FIA, often in combination with an optional income rider that may include a fee, can provide guaranteed income payments for life once you begin taking income, and those payments are not tied to market performance. An FIA can also provide a protected growth benefit alongside the optional income rider benefit.  

That means the income you receive won't decrease if the market drops, giving you the confidence to spend based on what you know you'll receive, not what the market happens to be doing that year. 

 

How a fixed index annuity works 

An FIA is a long-term contract issued by an insurance company that offers growth potential without directly investing your premium in the stock market, bonds, or other financial instruments. Instead, the interest credited to your annuity is calculated using interest crediting strategies, such as fixed rate, participation rate, or cap rate strategies, tied to the performance of an underlying market index. 

• If the index performs well, you receive interest credits
• If it doesn't, your principal isn't exposed to that loss 

The result: growth potential linked to index performance, without direct market risk to your premium, plus the benefit of tax-deferred growth. 

Because an FIA is built for the long term, your contract includes a surrender charge schedule. 

• After your first contract year, you can withdraw up to 10% of your contract value each year without a charge
• Withdrawals above that amount during the schedule are subject to a surrender charge
• The schedule sets how long that period lasts and how the charge decreases each year 

 

Building a retirement income plan around how you want to spend 

A goal-based plan can help you determine what type of guaranteed income makes sense for your retirement and gives you a clearer picture of what your spending could look like. Consider organizing your retirement spending into four categories: 

• Essential expenses
• Essential lifestyle expenses
• Nice-to-have lifestyle expenses
• Wishes

Start with your essential lifestyle expenses, since these are the least flexible. Look at what guaranteed income you already have, such as Social Security, and use that to determine how much additional income you'll need to comfortably cover the rest. That's where an annuity can help fill the gap, providing stable income throughout retirement and the confidence to spend more freely on the nice-to-have expenses and wishes further down your list. 

 

Talk to a financial professional about your retirement income plan 

Guaranteed income gives you more clarity about what you can spend in retirement, and that clarity can translate into more freedom to enjoy it. A financial professional can help you evaluate whether adding a fixed index annuity fits your broader retirement income plan.