Annuities as Income Vehicles

As you begin to plan your retirement, you may or may not have a good picture of how risky income planning can be.  The truth is that a frightening percentage of individuals do not adequately save for retirement and if you are on the border of not having enough, or even if you think you do have enough, there is a very real chance you could come up short later in your retirement years.

The scary truth

According to the US Census, the poverty rate for seniors between 65 and 74 is 23 percent.  This number rises to 35 percent after age 75.  For women, the numbers are even worse – 42 percent of women 75 or above live in poverty.  A recent US News & World Report article suggests that bankruptcies among seniors are on the rise.  In addition, many who retired have been forced back to work.  A recent study by AARP found that the employment rate for those 55 or above has actually increased 9 percent over the past year.  

The bull market of the 90’s caused a large number of investors to greatly overestimate the future value of their portfolio.  Many who retired in the past ten years withdrew far more than they should have.  Add to this, the market decline of the last three years, and the result has been a great increase in the number of seniors who thought they had adequately saved for retirement, but are only now realizing that they re at serious risk of running out of money. 

Why did this happen?

It wasn’t that long ago when people typically worked their entire career for one employer who provided a pension plan that would give some measure of security to the retiree.  Over the last 20 years, the need to save for retirement has shifted dramatically from the employer’s responsibility to the individual.  401(k) plans are now typically the plan of choice.  Unfortunately, these plans do not provide for the lifetime income stream that pensions did.

While the amount of information on income planning that is available to the individual has grown, much of such planning is based on static return and life expectancy assumptions.  Reliance on these assumptions could result on a large number of seniors coming up short in the latter years of their retirement.  Those that try to manage on their own are likely to find themselves having to reduce their income withdrawals at a time when inflation, and possibly poor health, are driving their income needs higher.  Even retirees with large asset accumulations may be ill prepared to handle these risks by on their own.

Income annuities offer the solution

While there is no easy fix for the lack of inadequate savings, the only way to guarantee yourself a lifetime income stream that cannot be outlived is through an annuity.  By taking a portion of your retirement savings and purchasing an income annuity, you can ensure that you will not outlive your assets. 

A recent study done by MetLife, in cooperation with Rand, found that across all net worth and total household income levels, guaranteed income streams (pensions, annuities, etc.) have a positive impact on retirement satisfaction.  Those who fund more of their retirement income with guaranteed pensions versus just savings are more satisfied.

Deferred annuities are asset accumulation products often sold to younger investors for the purpose of added tax-deferred wealth accumulation.  However, a study by LIMRA among annuity owners disclosed that only 22 percent of annuity owners realized they could convert their contract to a lifetime income.  Only a very small percentage of contract holders actually do take advantage of the lifetime income guarantees.

Good news for retirees

Fortunately for the consumer, the insurance industry has realized that as our society ages and the number of seniors skyrockets over the next 10-20 years, retirees will be looking for better ways to “deaccumulate” their retirement.  Future retirees will live longer and will expect a better lifestyle during their retirement years.  The result of this is that the industry has responded with a whole new generation of products that provide the necessary lifetime guarantees while including a myriad of options to provide flexibility to the investor, and overcome the concerns that some people have to annuitization.

Among the more popular features is a product that offers a withdrawal option, permitting withdrawals during the first two years.  Another option that is popular is the ability to elect to have full transfer flexibility among the variable investment and fixed investment options within the contract.  This can be both useful and add peace of mind during volatile markets.

While no single product can offer a panacea for the wave of baby-boomers about to retire, income annuities can be an important element to true financial security.  

To learn more about income annuities, check out these related articles:

Six Ways to Increase Retirement Income

The Immediate Annuity Solution to Long Term Care

The immediate Annuity -Old Investment Revamped for Modern Times

Health-adjusted SPIAs - Poor Health Can Be a Factor in Producing More Income

An Old Source of Income With a Modern Twist                                    

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