What to Know About Retirement Unknowns - Four Questions to Better Understand Retirement Income

Whether you've been planning for decades or scrambling to catch up for years, retirement is one of life's least defined and most surprising phases. We break down common retirement unknowns and some options you have to help tackle them.

Two people looking at documents to plan their retiremen

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Preparing for your golden years can both be exciting and intimidating. However, as you plan for your retirement there are several important factors that can make things easier to understand to create a clearer path for a successful retirement. Consider these four topics as you navigate the retirement planning space.

Will I Outlive My Retirement Savings?

The short answer to this question is: It depends. Many people heading into retirement, or planning for it, are concerned about focusing on accumulating as many assets as possible so they can spend them once they retire. However, those accumulated assets are highly dependent upon several factors, including taxes, market declines and even changes in personal lives, like divorce. And once retirement begins, retirees might begin spending their assets - and how quickly they spend also affects how long assets last.

To put this into perspective, the average 65-year old can expect to live another 20 years in retirement. It's estimated that half of those 65-year old retirees will live to 93. Unless assets were carefully calculated to take this into account, accumulated wealth is likely to decline in that time frame.1^"Secure Retirement Institute: The Retirement Reference Book, 2018, https://www.limra.com/en/research/research-abstracts-public/2018/the-retirement-income-reference-book---fourth-edition/"

A fixed index annuity can help provide more stability when it comes to finances in retirement. A fixed index annuity is a retirement product purchased from an insurance company in exchange for certain guarantees. As an insurance product, the money is not invested in any stock or index. It’s protected from index declines while still having the opportunity to grow each year by receiving interest credits tied to an increase in an external market index. The longer the income from the annuity is deferred, the more opportunity for tax deferral and growth potential there is.

The structure of a lifetime income annuity, or fixed index annuity with lifetime income benefit rider election, is built around longevity. This means it is designed to pay for as long as needed, with options for a spouse to continue receiving payments after death. Plus, it can clear a path for your legacy to loved ones and potentially eliminate probate time and cost.  

When is the Right Time to Retire?

Every retirement is different and so is your retirement threshold. Plans often change and so can your retirement plan, such as when you plan to leave the workforce. According to a recent survey, nearly half of retirees, 48 percent, left the workforce earlier than they’d planned. A majority of earlier than expected departures from the workforce were due to health or disability issues as well as company changes – but others left their jobs because they could afford to retire earlier.2^"Employee Benefit Research Institute: 2020 Retirement Confidence Survey, April 2020"

While there may not be a magic retirement age or dollar amount, reframing retirement assets as retirement income can clarify what your money can do for you when the time comes. Map out retirement priorities (i.e. must have’s, nice to have’s, want to have’s) and then identify the income option to fund them. 

A fixed index annuity can provide a reliable income stream that can last a lifetime. Depending on the annuity or rider option, there may be opportunities to carve out increased income flexibility to bridge income gaps for life’s unexpected expenses.

Can My Retirement Portfolio Handle a Market Downturn and How Does Uncertainty Impact My Nest Egg Growth?

Fixed index annuities also provide potential upside when it comes to growth and protect against potential downturns due to market volatility. A fixed index annuity product can help shield a portion of your retirement income. This guaranteed income stream provides payouts that are not tethered to the market, and also offers diversified index-linked crediting strategies for stability and growth potential over time. 

Money lost in market declines requires exponentially higher returns to recover, for example, a 10% loss requires an 11% gain to recover, a loss of 25% takes 33%, and 30% requires 43% to break even, and so on.3^These numbers represent the gain required to make up the loss from the prior year. Hypothetical example: year 1 loss reflects $100,000 -10% = $90,000; year 2 $90,000 + ($100,000/$90,000 = 1.11) +11% gain =$100,000 .  The math of percentages shows that as losses get larger, the return necessary to recover increases at a faster rate, a 25% loss takes a 33% gain, and a 30% loss requires a 43% gain to break even.

The principal protection of a fixed index annuity establishes a retirement foundation that you can build off of, saving yourself the time and capital it takes to recoup market loss, so your money can work for longer and harder for you. All of this coupled with the growth potential and guaranteed lifetime income payout options helps ensure a reliable lifelong income generator.

How Does Social Security Impact My Retirement Income?

Well over half of future retirees believe Social Security will cover their basic living expenses.4^"Secure Retirement Institute: The Retirement Reference Book, Secure Retirement Institute: The Retirement Reference Book. https://www.limra.com/en/research/research-abstracts-public/2018/the-retirement-income-reference-book---fourth-edition " However, Social Security covers less than half of a given worker's regular income before retirement.5^"Social Security Administration: Retirement Benefits Guide, https://www.ssa.gov/benefits/retirement/learn.html" Efficiency is key when it comes to retirement income. That means diversifying a retirement portfolio can help build stability that doesn't solely rely on Social Security. Only 7% of pre-retirees have a three-legged retirement plan that includes income from these three sources: Social Security, defined benefits and personally funded income.6^ National Institute on Retirement Security: Examining the Nest Egg: The Sources of Retirement Income for Older Americans, January 2020, https://www.nirsonline.org/reports/examining-the-nest-egg/"

A fixed index annuity can help turn assets into dependable income to supplement Social Security, a defined benefits plan and/or defined contribution account. Plus, it allows for penalty-free withdrawals annually (up to 10% of contract value), and increased payment options that can kick in if health care needs increase.7^Annuity distributions are subject to ordinary income taxes, and if taken before age 59-1/2 may incur an additional 10% federal penalty.

By looking at different factors that could impact your retirement, you can make sure you are prepared for the retirement unknowns that might come your way. Consider working with a financial professional to clarify the questions you have and prepare for a reliable source of retirement income for your future. 

 

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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.