When setting up your financial retirement plan, you’ll likely consider various options for how you plan on covering the bills in your golden years. With soaring inflation and aggressive rate hikes from the Fed, annuities have become more popular recently, as those close to retirement try to figure out how to ensure they don’t outlive their savings. According to the New York Times, the sales of annuities surged 22% in 2022 to reach around $310 billion. As of the second quarter of 2023, the total retirement assets in annuities were around $2.29 trillion.
Even though annuities can be a confusing investment, there are many situations where they can be the right move, since you’re trading in a lump sum today for guaranteed income payments in the future. Here’s a look at why you may want to consider annuities in your retirement plan.
Annuities Offer a Reliable Income Stream
“Annuities offer a reliable and guaranteed income stream, providing financial stability during retirement,” said Cameron Burskey, senior partner at Cornerstone Financial Services. “This can be particularly valuable in a volatile economic environment, as it ensures a steady flow of income regardless of market fluctuations.”
In your golden years, you’ll likely not want to stress about the market. As demonstrated in the last few years, the stock market can have heavy swings, and this could be difficult to manage when you’re trying to set a budget. Even though the degrees of risk vary with different kinds of annuities, as a whole, they can handle most economic fluctuations.
Annuities will provide you with a reliable income stream so that you don’t have to worry about covering your bills, since you’ll still have expenses to worry about. Sometimes, it’s more important to have consistency in your financial plan than anything else.
You Don’t Have To Worry About Running Out of Money
“With increasing life expectancy, there’s a concern about outliving one’s savings,” Burskey stated. “Annuities, especially those that provide lifetime income options, help mitigate the risk of running out of money during a longer-than-expected retirement.”
With people living longer, planning for retirement can be challenging, since you’re not exactly sure how long you need your money to last. If you rely on an investment portfolio heavily exposed to the stock market, you could eventually run out of money as you dip into your funds.
There are different types of annuities, but the main advantage of most is that you won’t have to worry about running out of money in retirement. You can turn a lump sum of cash into guaranteed income with annuities, which could be the best option for some.
Annuities Diversify Your Retirement Portfolio
“Including annuities in a retirement portfolio also adds diversity, balancing risk exposure,” according to Burskey. “While other assets, like stocks and bonds, are subject to market fluctuations, annuities can offer a more stable and predictable component to the overall investment mix.”
If you’re a risk-averse investor, you may not want to deal with the stress of price fluctuations. Purchasing a type of annuity would diversify your retirement portfolio, so you’re not overexposed in one segment.
Annuities Can Help With Tax Planning
“Some annuities even provide tax advantages,” remarked Burskey. “For instance, certain types of annuities offer tax-deferred growth, meaning that the earnings on the investment are not taxed until withdrawals are made. This can be advantageous for individuals looking to optimize their tax strategy in retirement.”
With a deferred annuity, the interest that you earn won’t be subject to taxes until there’s a withdrawal. This option lets your investments grow faster.
You Don’t Want To Stress About Your Expenses
“The guaranteed income feature of many annuities can help eliminate the worry of funding a certain portion of these future expenses,” said Paul Tyler, a licensed insurance agent, lawyer and CMO of Nassau Financial Group.
One of the biggest struggles about financial planning for your retirement is figuring out how you’ll cover your expenses, since you no longer have a steady income from your employer. You also want to ensure that you have enough money to cover all your expenses.
“A good retirement plan addresses both sides of one’s personal balance sheet — both assets and liabilities,” shared Tyler. “Most advisors focus on growing assets through stocks, bonds and other types of investment vehicles. Annuities help address the future liabilities of retirement — like paying for health care and general living expenses.”
You’ll want to create your retirement budget based on your expected costs in your golden years. This will require you to look at the expenses associated with health care and basic living. Then, you want to ensure you have enough money to be in a strong financial position.
You Don’t Have a Pension
If you’re not going to have a pension coming in during retirement, you may want to look into an annuity for guaranteed income. Since you’re giving your insurance company a significant lump sum, they’ll provide you with a guaranteed monthly income for life.
As a self-employed person or someone who doesn’t have access to a pension, you could use an annuity to provide you with the peace of mind of guaranteed payments in your retirement.
Closing Thoughts
“Before incorporating annuities into a retirement plan, it’s important to carefully assess individual financial goals, risk tolerance and the specific terms of the annuity contract,” Burskey shared. “Consulting with a financial advisor can help tailor an annuity strategy that best suits an individual’s unique circumstances and retirement objectives.”
It’s essential to remember that annuities can be confusing investment products, so you’ll want to take the time to understand them better. You’ll also want to work with someone you trust regarding retirement planning, since everyone has a unique situation.
Annuities are often used to have the money you’ve saved guarantee you with a lifetime income stream, possibly on a tax-deferred basis. They could be a valuable part of your retirement plan if you decide that this is the direction you want to take.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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