When the World War II generation finally retired, many former workers were able to count on a secure corporate pension to supplement their Social Security income. This pension income lasted for as long as they lived. Then it often continued to pay the surviving spouse after the initial recipient had passed away.
But pensions have largely disappeared from the corporate landscape. In turn, this has left an unexpected hole in the retirement plans of many retirees.
However, many people have found an alternative in annuities as a way to generate guaranteed income that they can count on every month. Annuities can provide a type of privately-funded pension income in a manner unlike any other type of financial instrument in the marketplace today.
Annuities are designed to pay a stream of guaranteed income for as long as someone lives. This holds even if someone receives more money from the insurance company than what was in their annuity contract.
Guaranteed Income, No Matter What Happens
Once you start your guaranteed annuity payouts, these payments won’t fluctuate due to prevailing market or economic conditions. From the perspective of the insurance company’s obligation to you, it doesn’t matter what interests rates do or how the major market indices perform.
Unless the insurance company becomes insolvent – and life insurance companies have an excellent record of holding strong even during the Great Depression, the financial crisis, and other challenging times – the insurer will maintain its assured payments to you.
Once the payout begins, the life insurance company assumes the entire burden of investment risk. It’s legally on the hook to uphold these contractually guaranteed promises to you.
There is a contractual guarantee to pay you income like clockwork. This guarantee can last either for the duration of your lifetime or for a set period of time, depending upon which payout option is chosen.
How Do Other Investments Compare?
Other assets that you may own, such as stocks or mutual funds, will rise and fall in value depending upon how the markets perform over time. The value of bonds and CDs will also go up or down depending upon the prevailing interest rate environment.
Sure, you can immunize yourself from fluctuations in bond and CD prices by holding them to maturity. However, they will stop paying interest once they mature. But annuities don’t have this type of limitation with the income stream they pay out.
The life insurance company guarantees this income stream for the time that the annuity policyholder has specified. And should something unexpected happen, those payouts can be taken over by a spouse or another beneficiary. Your payout options can be structured to fit this possibility as well.
How can annuities let you get more “bang for your buck” and maximize your retirement income? Some fixed indexed annuities that are built for income come with strong contractual guarantees that boost the lifetime payouts from the insurance company.
This means that you might be able to receive more income for less money in some cases. For example, many fixed indexed annuities today offer a guaranteed income rider that promises to pay out at least a certain amount of money each year.
It can cost you considerably more to generate this same amount of income using bonds, or other similar investments, than what you would have put into the annuity.
Put More Income Certainty Into Your Retirement Plan
Many financial professionals will recommend that you create a baseline income floor with your annuity. Then you can counterbalance this with more risk in your other holdings to generate more income or to accomplish other goals.
For example, say you are a very risk-averse investor seeking guaranteed income. You could put a portion of your money into either an immediate annuity or a fixed indexed annuity with a guaranteed income rider. Either option would enable you to receive guaranteed lifetime income.
Then you could invest your other savings in slightly more aggressive types of investments such as stocks, growth-oriented mutual funds, or even junk bonds to generate more “maybe” income for your retirement goals.
The annuity will pay your “for-sure” or “permanent” income alongside the “maybe” income from your more aggressive holdings.
A Monopoly on Guaranteed Income for Life
For maximizing income, annuities tend to be better than bonds and other fixed-income assets due to the mortality credits from insurance companies that are factored into every annuity payment.
Another major advantage of annuities is that the IRS imposes no limit on the amount that can be put into the contract at one time. This can be a helpful strategy for supplementing your other income sources that will come from your retirement accounts, which do have annual contribution limits.
However, you can’t deduct any monies that you put into a non-qualified annuity. A non-qualified annuity doesn’t have the same tax advantage as retirement accounts do in that regard.
What’s more, the money that you withdraw from your annuity is taxed as ordinary income. It’s good to keep this in mind as you plan for your future retirement tax picture.
What If You Want Some Income Flexibility?
The guaranteed income riders that are now available with many fixed indexed annuities allow you to turn a guaranteed stream of income off and on whenever you please. This is a major improvement in annuity design.
Beforehand, many traditional annuities would only pay a guaranteed stream of income after the annuitant (also known as the payments recipient) had annuitized the contract.
Once this happened, the annuity would pay a guaranteed stream of income that couldn’t be stopped or altered for any reason, other than the death of the annuitant.
How Does This Benefit Work?
But if you have one of the new indexed annuities with a guaranteed withdrawal benefit, you have some flexibility. This benefit includes the ability to stop receiving income for a period of time if you would like to withdraw some of the principal from the contract.
After you have done this, you can then turn the rider back on and continue receiving payments. Of course, the payments will be reduced in size because the rider now has less principal in the contract to draw from.
Annuities offer a wide range of benefits to retirees today. They have a monopoly over other financial instruments on paying you a truly guaranteed income for life. Not only that, their other guaranteed benefits can help bring more stability and predictability to your portfolio in other ways.
Explore Your Options to Maximize Your Income
Consult your financial advisor to find out more about annuities and how they can benefit you.
By maximizing your lifetime income, you can enjoy an even more fulfilling and comfortable retirement lifestyle. Depending on the goals you have, annuities may well help you bridge this gap and enjoy your retirement on your terms.
What if you are looking for a financial professional to walk you through the “what-ifs” of your retirement years? No worries, help is available just a few clicks away at SafeMoney.com. You can find an experienced, independent financial professional with whom to discuss your personal goals, concerns, and overall situation.
Use our “Find a Financial Professional” section to connect with someone directly. You can explore the possibility of a working relationship at no obligation. Should you need a personal referral, call us at 877.476.9723.