According to the U.S. Social Security Administration, the average 65-year-old man could expect to live until age 84. For women age 65, the average expectancy is more than 87 years old. Moreover, one in four 65-year-olds will live past age 90. One in 10 will live past age 95.
Let those figures sink in a bit. When you think that retirement income may need to last between 30 and 40 years, it's easy to understand why Americans are stressed. In fact, a recent study conducted by Gallup in 2017 indicates that “U.S. adults are most concerned about not having enough money for retirement and not being able to pay medical costs of a serious illness or accident."
There's no better time than now to evaluate sources of retirement income
For most people, retirement income will probably come from several sources such as 401K plans, IRA, personal savings, Social Security benefits, employer pension, various types of insurance, annuities, real estate, inheritance, etc. It's important to evaluate each in the context of your broader plan and the need for income long into the future.
Retirement annuities can provide lifetime income
For people concerned about ensuring their income lasts through retirement, annuities may be an option. You may have heard of retirement annuities but don't understand what they are or how they work. Here's a quick definition: An annuity is a contract entered into between you and an insurance company. You can buy an annuity by making a lump sum payment or a series of payments over a period of time. In turn, the insurance company agrees to make payments to you either immediately or at some future date for a set amount of money, a set amount of time - or both. Consider this illustrative example: you are planning to retire in 15 years and decide to purchase a $30,000 retirement annuity today that will begin to pay out when you retire.
This is also called a deferred annuity. The annuity accumulates value (or grows in value) for the next 15 years, at which time, the Insurance Company will pay you a lump sum or series of payments based on the terms of your contract. This payment phase is called annuitization and is the point at which the contract value is applied to a chosen payout option. Annuities come in a variety of flavors, with some earning a fixed interest rate and others participating directly or indirectly in the stock markets. Annuity contracts can offer income for a specific amount of time or for a lifetime if you're concerned about outliving your retirement. In other words, when you retire you could be able to enjoy a predictable income stream. In addition, annuities can offer tax deferred growth, guaranteed income and guaranteed death benefits.
Smart financial planning
If an annuity is something you're considering whether or not to purchase truly depends on your personal financial situation. Furthermore, it's important to note that annuities are generally long term investments and as such, withdrawals made prior to age 59½ may be subject to a 10% penalty tax. Many annuities include significant surrender charges for certain withdrawals made within the first few years of the contract, depending on the carrier.
What is clear is that annuities may be able to provide financial peace of mind through predictable retirement income, if that is your concern. As always, a financial professional can help you evaluate your retirement readiness and investment options to meet your specific needs.