In order to understand why adjusting a retirement income strategy might be a good step, it’s important to look at current market conditions and what could potentially influence returns and gains in a portfolio. In our white paper, co-authored by Michael Finke, Ph.D., it becomes clear why annuitizing income can become crucial.
As fewer than 20% of workers will retire with a pension, less Americans know how much they can spend once retired. While there are plenty of options to secure relatively stable retirement income through investments like bonds and CDs, it’s still up to the retiree to gage risk and how conservative they want to be. Because of how the market moves, not spending savings and just living off of dividends and interest earned might also not be an option. For example, an investment of $250,000 in funds that represent the S&P Index historically produced $10,725 of income each year. Today, the same amount produces just $3,225 of annual income.
That’s where annuities can help make a difference for pre-retirees and retirees.
Why Guaranteed Lifetime Income Can Lead to Reliable Spending
Many retirees run into an issue commonly referred to as longevity risk, or the unknown horizon in a person's lifespan. The awareness of the unknown can lead to retirees spending less because they don’t know how long retirement will last, and they don’t want to risk running out of money.
An annuity can reduce the impact of the unknown by providing lifetime income payments once retirement starts. Because annuities are based on exact calculations that consider the retirees' annuity contract value, age when income starts, and payout factors, they can enable retirees to spend more each year. Research on retiree spending shows that those who have annuitized savings spend significantly more than retirees who fund a lifestyle with investments alone. Having the confidence to spend earlier in retirement can help a retiree to live better when they’re younger and enjoy a more active lifestyle.
Fixed index annuities allow a retiree to buy future insured income before they actually need the income. The insurance company invests mainly in bonds to ensure protection of the original amount placed in the annuity (principal), and invests a portion in financial options whose performance determines the interest amount credited to the annuity over time. Benefits include tax-deferred growth potential and principal protection against index volatility.
Workers near retirement can begin locking in a higher future income through the use of a fixed index annuity that provides the opportunity to potentially spend more each year than an investment in other conservative assets.
Why having a plan is Important
A goal-based process can help decide what guaranteed income versions might work best for retirees and pre-retirees. It will also provide more clarity of what spending can look like through annuitization.
Consider creating a plan based on four categories to get a clearer picture of how you plan to spend your money.
- Nice-to-Have Lifestyle Expenses
- Essential Lifestyle Expenses
- Essential Expenses
For anything that’s not flexible, it’s important to evaluate where existing income is coming from, like Social Security. That in turn will then determine what’s needed to fund any flexible spending that can include some of the things that might be on a wish list. Here, an annuity can provide stable income throughout retirement.
Because guaranteed income provides more clarity about how much retirees can spend in retirement, it can lead to more flexibility and allow for more spending throughout retirement.
The information provided in this blog was obtained from the white paper “Funding Reliable Spending Through Insured Retirement Income,” written by Michael Finke, Ph.D., for American Equity.
This content is for informational purposes only, and is not a recommendation to buy, sell, hold or rollover any asset. It does not take into account the specific financial circumstances, investment objectives, risk tolerance or need of any specific person. In providing this information American Equity Investment Life Insurance Company is not acting as your fiduciary as defined by the Department of Labor. American Equity does not offer legal, investment or tax advice or make recommendations regarding insurance or investment products. Please consult a qualified professional.
Annuities are long term vehicles designed for retirement income and are not suitable for everyone. They involve restrictions and charges, including possible surrender penalties for early withdrawals. Annuity distributions are subject to ordinary income taxes, and if taken before age 59-1/2 may incur an additional 10% federal penalty. Guarantees are based on the financial strength and claims paying ability of American Equity and are not guaranteed by any bank or insured by the FDIC. Availability may vary by state. Possible interest credits for money allocated to an index-linked crediting strategy are based upon performance of the specific index; however, fixed index annuities are not an investment, but an insurance product, and do not directly invest in the stock market or the index itself. Product and feature availability may vary by state.