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Do you worry about a gap between your retirement income and actual living needs? You wouldn’t be alone. More than half (61 percent) of respondents to an AARP survey said they are worried that they will not have enough money to support themselves in retirement. (Are you one? Retirement income gap calculator)
Recent bouts of inflation likely fanned those worries, as people weigh the effect of rising living costs against their retirement savings. That comes against the backdrop of growing longevity, with people needing to stretch retirement savings over longer life spans.
As people approach retirement, some will no doubt have to look at lifestyle changes, working longer, or resorting to other tactics to make their retirement work.
But there is a tool available that could help manage the challenge: An immediate income annuity.
Annuities are contracts where, in exchange for a series of payments or a lump-sum, an insurance company will provide a guaranteed stream of income, often for the rest of the contract owner’s life. In the case of a single premium immediate income annuity, those payments start right away.
In short, an immediate annuity starts a guaranteed stream of income for a retiree.
“No other financial instrument can accomplish what an annuity does, that is provide a guaranteed amount of principal and income, on a periodic basis, for the rest of your life, no matter how you long you live,” said Gregory L. Olsen, a partner at Lenox Advisors in New York City. “It is for that reason that most people approaching retirement or already in retirement, should consider a portion of the retirement assets to provide a guaranteed stream of income through a lifetime annuity.”
An immediate annuity example
Let’s say that you and your significant other have worked with your financial professional to come up with a plan to secure your finances for the next 20 years of your retirement. After pulling in your Social Security benefits and returns from employer-sponsored retirement plans, you’ll have $86,400 in annual income.
You’ve done a good job of saving over the years, let’s say $1.5 million. That number is certainly nothing to sneeze at, but you also figure out that you’ll have roughly $120,000 in annual expenses when you add up everyday necessities like food, housing, and medical costs. Beyond that are fun things like travel, going out, doting on grandkids, and doing the things that make life worth living.
That $33,600 needs to come from somewhere, so how do you fill that gap?
One option is that you could keep withdrawing from your $1.5 million in assets over time when you need them, but those funds won’t last if you end up living longer you than expected. There’s also sequence of returns risk to consider.
But one way to ensure that you never run out of money is to buy an immediate annuity with a lifetime guarantee option.
Comparing the two alternatives:
By purchasing an annuity rather than solely using managed withdrawals, you can secure lifetime income, maintain your current lifestyle, and have an extra $256,821 to spend on your retirement goals or leave to your loved ones.
Annuities aren’t for everyone; everyone’s retirement situation is unique as we all come from different walks of life. It’s important to speak with a financial professional to ensure that the tools that can help foster your retirement goals are right for you. Exploring your retirement options is so important as fluctuations on cost of all things vital and benign continue to make us question our purchasing decisions. Contact your financial professional today and see if an annuity can help augment your retirement.
Discover more from MassMutual …
Annuitization: What it is and how it works
6 ways to turn your retirement savings into income
Annuities: Criticisms and rebuttals
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1 Any guarantees explicitly referenced herein are based on the claims-paying ability of the issuing insurance company.
2 Assets required to create or purchase necessary income are based on the identified income gap. Option 1 uses Managed Withdrawals to fill that gap, based on a 4 percent withdrawal rate from a fixed account seeing 4 percent interest and 4 percent inflation over the course of 20 years, assuming no market loss.
3 Option 2 uses a MassMutual RetireEase Joint & Survivor Life with 20-year Period Certain issued in CT annuity option (SPIA). Rates are effective as of 8/13/2024 and are subject to change.