The average retirement age has increased over the past decade and will continue to grow. It means many people with jobs must continue working into their senior years.
Some people adjust well, while others struggle. There is no single answer that applies universally. The main factor in determining how you will cope with this transition or not is what type of retirement income strategy you choose for yourself.
A pension or social security is a great option for many people. Still, it can be challenging for retirees when their desired retirement income starts dwindling before they reach the new age threshold, where they should be able to retire from their job responsibly and comfortably.
How to Use Annuities for Retirement Income
1. Investing in an annuity
The key to maximizing your retirement income is to ensure you don’t outlive your retirement savings. Annuities are designed to help people manage this risk.
Annuities pay your money back in fixed monthly payments while you are alive, and they continue delivering those payments as long as you have any money left to pay them back. Planning for retirement means having enough money stashed away for you during what will almost certainly be a time of significant life changes.
2. Choosing the right annuity for your needs
Annuities vary greatly in how much you can withdraw, what that withdrawal rate is, and the tax implications of buying an annuity. There are different types of annuities, and it’s important to know what type best suits your needs.
There are three main types of annuities: deferred, immediate, and joint and survivor (J&S). Deferred pay you back at a future date—the primary income you back now. J&S generally pays you back at the death of a spouse.
3. Choosing the right fund
Many types of individual, exchange-traded (individual stocks, ETFs), and mutual funds exist. You should do your research before investing to make sure you’re choosing a fund that can adequately provide you with monthly income once you retire and that can be sold at a low capital gains rate or even zero capital gains rate if the investment is held long enough. Investing in an annuity holder may need to combine your assets with other funds into one portfolio.
4. Choosing the right insurance provider
An annuity is a contract that pays you monthly money; the only way that can happen is by someone holding up their end of the deal. Insurance providers offer some of the best annuity products on the market. They are held to specific standards, and they have to make sure that they are able to pay out your annuity outside of bankruptcy as long as they remain solvent. It can be an enormous source of security if you choose carefully.
5. Choosing how to finance your annuity
There are several different ways to fund an annuity. The most common is through an insurance company, which generally makes its money by charging a monthly fee for providing the product. You may also choose to put some of your investment assets into an annuity provider that collects those assets, which allows the annuity provider to invest those assets and invest on your behalf in bond funds and other investments that pay out more than just your initial investment. Others choose to hold their own money and invest it in individual stocks or mutual funds that pay out on every penny you have invested in them.
6. Determining your withdrawal rate
There is no rule of thumb for determining what your rate of withdrawal will be. It really depends on the type of annuity you choose, the amount you can withdraw, and how long you would like to continue withdrawing that money.
Tips for Advanced Investors
1. Choosing the right annuity
Not all annuities are created equal. There are several significant differences in the types of grants for people to consider when deciding which one to choose. Some have better withdrawal rates, some have better tax benefits, some have higher fees, and some have lower prices and caps on how much you can withdraw at once.
2. Looking at life expectancy
People need to remember that an annuity plan is designed to pay you out while you’re alive, not after you die. You may also want to do a little research about your life expectancy to ensure you won’t outlive your income by much.
You should purchase a deferred annuity with your retirement savings plan rather than immediate assistance, which can be good for short-term security but bad for long-term survival.
It’s also essential to find out what happens if you live longer than the guarantee period with an immediate annuity. Some contracts will pay out anyway, but this differs from standard procedure.
3. Insurance companies
You may have heard that insurance companies are in financial trouble, but many still offer great products. In fact, most of the better annuities will be issued by insurance providers, who are generally active in the market and growing more so. They have a strong reputation as well as financial institutions. Many insurance companies have also begun offering individual lending options and mutual fund-based options for retirement savings and investments.
4. Building an investment portfolio
Suppose you want to build a portfolio for an annuity payout to occur. In that case, you need to ensure that the total value of the assets in your portfolio does not exceed your gross annual withdrawal rate for when you die (the amount of money left after you’ve paid taxes on that money). It means you will receive the same funds at your death regardless of how much money you put down on the annuity. If you put $1,000 in a mutual fund, and your withdrawal rate is 25 percent, if you don’t purchase an annuity, then when you die, you will receive $625. If you do buy an annuity, however, if all those funds were spent on immediate assistance, your monthly income would be reduced to $500 ($125 times 12 months). If you invested the same $1,000 in individual stocks, your monthly payment would be only $150 ($25 times 12 months).
5. Exchange-traded funds
Exchange-traded funds (ETFs) are typically very cost-effective compared to other alternative investments like mutual funds, individual stocks, or even bonds. ETFs are better in the long run because they perform better than joint and individual stocks. They can be traded on major exchanges like the New York Stock Exchange, NASDAQ, and many other exchanges worldwide. This makes them ideal for individuals looking to make short-term and long-term investments.
6. Role of the insurance company
One thing you should keep in mind about your annuity provider is that it is not a broker, bank, or investment advisor. It does not have to act in your best interest; it can also take advantage of you by pushing high-risk investments that are likely to only pay off for a while.
A retirement plan is an essential financial tool that allows you to voluntarily save for your future and leave money for others you love. It is your responsibility to make sure your retirement plan is solid and will keep you in good financial shape. If you have no retirement plan, starting one should be easy because it will allow you to save money voluntarily. However, if you are already saving a pension, it may be wise to transfer this money into a new retirement plan before any significant amount of time has passed and before the plan’s interest rates or benefits change.
