As part of any retirement planning scenario, you will look at all the options available. Whether this is maintaining a portfolio complete with stocks, ETFs, 401(k), or real estate, there is no shortage of financial options that you can use to help create a retirement portfolio. 

One of the biggest questions many people will want to ask is whether an annuity fits in as part of their retirement planning. Essentially, this is a way to ensure guaranteed income when retired, and while annuities don’t come without risk, they also make sense for those in specific financial situations. 

Providing Stable Lifetime Income

If you feel most comfortable knowing that you have guaranteed lifetime income while retired, an annuity is right for you. When you’re invested in an annuity, you are not worried about market volatility as you know you have a steady monthly income like clockwork. 

There is no question that many retirees worry about outliving their savings, especially those retiring without any pension. This is especially true for anyone who might be heavily invested in the market and can stress over long-term sustainability. 

Which Annuity Type? 

Instead, you can convert a lump sum annuity into guaranteed payments for life. The best case for most people in this situation who want stable lifetime income is a single premium immediate annuity. 

When you’re invested in this type of annuity, you have guaranteed income that is not reliant on any market or interest rate volatility. You can even start receiving payments as early as one year after making your lump sum payment. 

As an added benefit, this type of annuity is also tax-deferred so that you can reap the benefits of compounded growth. Additionally, if you paid for the annuity using the money you already paid taxes on, you’re receiving another income source that is considered, at least partially, to be “tax-free.” 

Separately, a Deferred Income Annuity might be ideal for those who want to delay payouts for up to 5 or even 20 years after making a lump sum payment. There is a higher payout than an immediate annuity, but it has a more extended waiting period until payments start. 

Avoiding Any Market Downturns

One of the biggest fears you might have as you approach retirement or are already retired is concern over market volatility. As bull markets can’t last forever, someone concerned about this might look toward an annuity to ensure they have guaranteed income without any concern over the market crashing. 

In other words, an annuity will help reduce your dependency on stocks to sustain your lifestyle while retired. The best part is that you don’t have to worry about panic selling in the event of a market crash that can leave a permanent mark on the portfolio, as well as leaving a reduced amount of available wealth to live and support a lifestyle. 

Which Annuity Type? 

If you are someone in this situation who wants explicitly to avoid market downturns, look to a Fixed Indexed Annuity for the future. This tax-deferred, long-term savings annuity protects your original lump sum deposit in case the market goes down, all while providing growth opportunities when the market goes up. 

In many cases, you have two choices with a fixed indexed annuity in that you can work to choose one that goes through an index portfolio like the S&P 500 or a fixed interest rate earned on your account. You may even be able to select an annuity that is a combination of the two. 

At the end of every term, you receive your earnings if the market has performed well, ensuring you can pass on any assets to your beneficiaries and or a spouse. 

Covering All Essential Living Expenses

Another real scenario for looking at an annuity is for anyone who wants a stable income to cover their essential living expenses. This would include the basics like housing, food, utilities, and even healthcare, where you wouldn’t have to worry about market volatility to pay for basic needs. 

Using an annuity means that someone in this scenario knows precisely how much money from the annuity is coming in every month so that they can budget their spending appropriately. This would be a great choice to pair with Social Security or any pensions available to the retiree. 

Which Annuity Type? 

In this scenario, a fixed annuity is likely the best course, as you know you have a minimum interest rate and a fixed amount of money with your monthly payments. As you can pay for a fixed annuity with either a lump sum or payments over time, you may also be able to maintain some of your current principal. 

When the insurance company begins to make payments, it does so based on the amount of money paid into the account, the individual’s age, and how long payments are expected to continue. 

The best part is while the fixed annuity is accruing in size, it’s doing so tax-deferred. You can also pick a fixed annuity that is either an immediate annuity where payments begin immediately or a deferred annuity that starts later, all while producing guaranteed and predictable income. 

Covering Until Social Security Payments

Someone looking to stop working before they can claim their full Social Security benefits may be an ideal person for an annuity. This individual is likely looking to generate income for a few years between retirement and Full Retirement Age or deferred payments until they are 70. This means an annuity would provide temporary income and delay any potential withdrawals from a retirement account. 

Which Annuity Type? 

In cases like this, where the annuity is meant to cover an income shortfall for a predetermined period, a short-term immediate annuity is a great option. As you might suspect, this type of annuity takes a lump sum of money and converts it into a guaranteed income stream for a predetermined time frame, likely a short-term period. 

With this annuity type, you might want to set up a period that enables you to receive payments over 10 years instead of your whole life. Instead of considering an annuity as guaranteed income for life, you can strategically use it as a short-term opportunity to generate positive cash flow. 

Offsetting Any Longevity Risks

Unfortunately, we don’t know how long we will live, making it difficult to plan for retirement. This also creates a concern that you could run out of money during retirement, which is a real consideration for millions of Americans. 

Given rising healthcare costs now and the potential for long-term care costs as you age, there is a definite consideration for ensuring stable income during retirement. This scenario is where an annuity can come in and save the day. 

Which Annuity Type? 

In this specific case, where someone is looking to offset longevity risks, the easy recommendation is to choose a Qualified Longevity Annuity Contract or QLAC. In this annuity case, the retiree will pay a lump sum or a series of payments into the QLAC, while the insurance company guarantees a monthly payout for life, which can start at a predetermined age or date. 

Individuals who chose this annuity also receive the added benefit of being able to delay RMDs from 73 to 85, which can preserve short and long-term additional capital. You can even use funds from a traditional 401(k) to purchase the annuity, which means a smaller amount of money in a retirement account, which results in smaller RMDs, which in turn means reduced income and, therefore, lower taxes. 

 

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.