Annuities like reverse mortgages often get a bad rap. We've all heard stories of retirees being sold annuities that left them worse off than before they made the purchase. Admittingly, annuities aren’t right for everyone. No financial product is. But for the right retiree, they can be a valuable part of a diversified retirement portfolio especially if the goal is to lock in protected lifetime income to help pay for retirement expenses. This all sounds great, but how can you tell if an annuity is a good choice for your retirement?
We've put together the top three reasons to help you to begin answering this question.
Social Security won’t be enough to cover your essential expenses
Having secure income in sufficient amounts to pay mortgage or rent, utilities, groceries, car payments, and medical copays is a top retirement spending goal. These are essential expenses that have to be paid, so it's important to have reliable income sources (Social Security and pensions) to pay them. You may think you can rely on withdrawals from investments and savings to meet these expenses, but this can be risky because their value fluctuates depending on market conditions that could decrease the amount of income available. If your essential expenses are higher than payments from other reliable income sources adding an annuity to your retirement portfolio to address this gap can be a smart move.
Expect to live a long time and could potentially outlive your savings
A long life can be a wonderful thing, but it cost. Funding a long life solely from savings can be risky because you don't know how long the savings need to last. To stretch savings you'll need to spend conservatively early in retirement to meet expenses later. While this strategy could work, it's inefficient and risky because it leads to a reduced level of spending and a lower standard of living. Furthermore, even if spending conservatively, savings are subject to market volatility that could further reduce spending. An efficient way to ensure lifelong income is to not spend conservatively but to spend from more reliable income sources like Social Security, pensions, and annuities that provide lifelong income unaffected by market performance. If you expect to live a long life and you're unsure if you have enough income to last and you want to avoid the uncertainty associated with generating income from investments, an annuity can be a safe and secure way to provide income you cannot outlive.
Want to reduce risk and protect part of your portfolio
Attempting to sustain a fixed living standard using distributions from a portfolio of volatile assets is an inefficient retirement income strategy. That's because markets go up and down resulting in widely fluctuating levels of spending. One solution to this challenge is using reliable income sources that are unaffected by market performance. The best sources of this type of income are Social Security, pensions, annuities, and cash-value life insurance. If the goal is to protect a larger part of the portfolio from investment risk an annuity may be the best strategy for accomplishing this goal.
Putting it all together
There are no one-size-fits-all approaches to retirement income planning. There are as many solutions as there are retirees. But while the income needs and strategies are different, the goal of protected lifetime income is the same. Apart from Social Security and pensions, annuities are one of the tried-and-true ways of providing lifetime retirement income to meet spending needs with the least amount of risk.