Retirement Planning Blog

Millions of Americans depend on annuities for retirement and for tax-advantaged accumulation. But if you are considering one, you might be unsure about which questions to ask about an annuity. Beyond that, you also want to be able to judge whether a specific annuity product is right for you.

Essentially, an annuity is a contract between you and a life insurance company. The contract provides tax-deferred growth for your money and different choices for your payout options: a lump-sum payment, income for life, or income for a set period.

Most annuities are started with money from retirement accounts -- 401(k) plans, IRAs, or Roth accounts. But you can also purchase an annuity with personal savings or proceeds from a transaction like a home sale. The money you use to begin your annuity contract will have its own tax implications, so keep that in mind as you consider your options.

Determining what annuity is right for you is up there with other important retirement decisions. After all, these are your life savings.

You want to be sure that you bought the right annuity contract -- if indeed it does make sense for you -- and that its unique features and benefits solve for the existing gaps in your portfolio.

Here are some questions to ask about annuity options that can help you narrow down your choices to the right fit.

Everyone faces challenges to some extent when moving into retirement. Even those with the best-laid plans can still have some financial hiccups. And with everything that has happened in recent years, millions of Americans are wondering what it all might mean for their financial futures.

Take, for example, a 2020 workplace wellness survey put out by the Employee Benefit Research Institute. In the study, 1,028 workers of ages 21-64 said that they worried about their finances and retirement savings.

Two-thirds of employees felt stressed when they thought about their financial future. Almost half were concerned with their household financial well-being, with saving for retirement and having funds for an emergency being the top stressors.

How You Can Secure Your Future?

Many employees felt these pressures to some extent from the impact of the novel coronavirus. But you don't have to personally leave your financial future to chance.

What can you do personally to keep your plan intact? Here are some key steps that you can take to have your planned retirement stay as much on track as you can.

Nothing is ever foolproof. But these steps can go a long way toward helping you keep in lockstep toward your retirement goals.

Many Americans worry about whether they have saved enough to have a comfortable retirement. But, surprisingly, most haven't actually crunched the numbers to estimate how much money they will need in retirement in order to live comfortably.

According to a survey by the Employee Benefit Research Institute, just 42% of Americans have attempted to calculate how much money they might need for retirement. In other words, almost 60% haven't estimated how income they might require.

A Gap Between Retirement Confidence and Readiness?

In the survey, just 3 in 10 people said they have tried to estimate how much they might pay in healthcare expenses during retirement. These are sobering findings, considering that many people report they are confident in knowing how much money they need to live comfortably in retirement.

Six in 10 (67%) said they were "somewhat confident" about their understanding of their income needs. As for higher levels of assurance, two in 10 (23%) said they were "very confident."

However, as the Employee Benefit Research Institute's other findings show, the vast majority of retirement savers haven't actually calculated how much money they might actually need. This could set retirement savers up for a future of unnecessary stress – and even reduced lifestyles.

Starting on January 1, 2021, Social Security beneficiaries will see a boost in their benefits. Over 70 million recipients of Social Security and Supplemental Security income will receive a COLA bump of 1.3% in their monthly payouts.

This increase is lower than the increase of 1.6% for 2020 by 0.3%. It's also 0.1% lower than the average COLA of 1.4% that recipients have received over the last decade.

The average Social Security recipient will see a monthly bump-up of about $20 overall. In other words, that will be an increase from an average benefit of $1,523 in 2020 to $1,543 in 2021.

Healthcare spending in retirement has already been a hotbutton financial issue for some time. But the Covid-19 pandemic has turned the healthcare industry on its head.

According to an article on healthcare publisher FierceHealthcare.com, PricewaterhouseCoopers says it's hard to tell what may be ahead for future healthcare spending. The professional services firm recently unveiled a new report on medical costs for employer-based health insurance plans, which had new some firsts.

For the first time ever in 13 years of doing this, PwC ran scenario-based analysis for its healthcare projections -- instead of a single overall projection for medical costs.

There is no doubt that the pandemic has broad public health and economic impacts for millions of people.

From employment taking a hit and emergency funds being tapped to working-age and retirement-age households pivoting financially to deal with the unexpected, the effects have been widely felt.  

While a lot has happened in 2020, many people actually expected some sort of reversal in financial markets and economic conditions back in 2019, a survey found earlier this year.

According to Spectrem Group, an investor research firm, one of the biggest fears for investors in 2019 was a market downturn and ensuing economic downturn. While this didn't happen then, the novel coronavirus pandemic brought it about in 2020.

A record-breaking market downturn and economy shutdown sparked fears of a recession. Since then, markets have recovered.

But investors continue to worry about the long-term effects of the recession that has hit the United States and other parts of the globe.

Retirees today face a host of financial challenges that previous generations didn't. The exit of guaranteed pensions from the private sector, coupled with increasing lifespans, has left many older Americans scrambling to make ends meet.

Not only that, there is often the need to start providing care for elderly parents or other relatives who have become unable to perform one or more of the activities of daily living (ADLs).

Paying to have this type of support professionally can be a financial burden for those who don't have any insurance to cover them. But providing the care yourself can be equally burdensome in other respects.

Nationwide Retirement Institute conducted a comprehensive survey on caregiving and how it affects the lives of the caregivers. The survey researchers looked at those who were in the middle of their careers. These folks are commonly referred to Gen Xers or the sandwich generation.

The survey was designed to find out how they fared in retirement when also dealing with the challenge of caregiving for loved ones.

If you are looking for a decent rate for your money, your local bank might not offer much to write home about. We already are in a low-interest rate environment, and the Fed doesn't appear to be ready to raise rates anytime soon.

This is, of course, one of the effects of recent public health and economic conditions, which also might not be winding down anytime soon.

When it comes to earning interest, one option that banks offer is a certificate of deposit.

When you think of the word "risk,” you may get a mental picture of such activities as skydiving, race car driving, rodeos, or other similar activities that have uncertain outcomes. For investments, the word "risk" may make you think of losing your life savings on a high-risk venture such as an oil and gas drilling partnership.

But the reality is that there are many different types of investment risk. All investments carry their own types of risk. It's important to note that no investment exists without any type of risk.

Everything Has Risk of Some Sort

There is always risk of some form inherent in every investment (and every financial instrument, for that matter), even those that are "safe.” They may have guaranteed interest and principal, but they are vulnerable to inflation.

For that matter, even cash itself has this inflation risk exposure. The key then to dealing with risk is learning how to manage it effectively.

A well-diversified portfolio will be subject to a variety of investment risks. That way a single given risk will have a much lower chance of being able to effectively disrupt the performance of an entire portfolio.

Sequence risk is the risk that you will take a big loss early on in the life of an investment portfolio. It's already bad when you have investment losses at the early start of your retirement. It's equally bad when you take losses just before you retire.

But if you are retired and taking withdrawals when the portfolio losses happen, the impact of those losses is compounded. By taking a withdrawal, you are already drawing down the balance of money in your portfolio from what it was prior.

If your portfolio also sustains a loss at the same time, the effects of both will come together to affect you. You will not only have to eat the loss, but you will further deplete the balance in your portfolio. So the timing of your withdrawals matters, especially in relation to how your portfolio performs.