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Outliving Your Income

One of the most common fears people share when considering retirement is the very real possibility of outliving the money they’ve worked so hard to save.

One of your main concerns when planning retirement is to ensure your money lasts throughout your life. After all, you worked hard and saved your entire life -- you shouldn't have to worry about reducing your lifestyle or worse running out of money. 

Making sure your retirement is properly funded remains an ongoing challenge given the number of risks and concerns you'll face -- risks like market volatility and economic uncertainty. On top of that, we're living longer than in the past. 

The steady income for life provided by company pension plans--if you were lucky enough to have one--countered some of those risks, but pensions are disappearing from the American landscape. Today, only 26 percent of American workers have access to a defined-benefit pension plan, according to a Bureau of Labor Statistics survey in 2018.

Even with all of the risks and concerns a person has as they face retirement, even in the absence of a pension, there is some good news: You can get that kind of protected monthly income by investing in an annuity. 

"Put simply, an annuity is the only financial product that can generate income that will last as long as someone may live, whether that is to age 80, 90, 100, or 110," explains Frank O'Connor, vice president of research and outreach at the Insured Retirement Institute. 

Annuities are a form of insurance against living a longer-than-expected life that guarantees an income for as long as someone lives. Insurance companies can provide them because they're able to pool the risk among a wide range of individuals. 

Allocating a portion of your retirement savings into an annuity also helps avoid a second issue associated with working with lump sum investments, says William G. Gale, The Arjay and Frances Miller Chair in the Federal Economic Policy and Director of the Retirement Security Project at the Brookings Institution think tank in Washington, D.C.

If you draw down your lump-sum savings too aggressively and live longer than you expected, you might have to rely on less in your later years, he says. But, conversely, if you draw down your savings too conservatively and pass away earlier than you expected, your thrift will have been unnecessary and you won't have enjoyed your retirement years as much as you could have.

Having some portion of your retirement assets in an annuity reduces these two risks, Gale says. You can have a standard of living that's higher than in the conservative draw-down case and be assured that protected lifetime income will last as long as you do.

O'Connor believes that the temptation to overspend is greater when you see your savings as a lump sum. "Retirement savings will seem like a financial windfall at first," he says, "but using the 'pot of gold' without a plan creates a high probability of exhausting those savings while you still need them."

An equally worrisome threat for retirees is market risk. This is the risk investments face as a result of market ups and downs. A concentrated run of poor market performance—can be substantial, especially if it happens early in retirement. This risk can mean lower-than-hoped-for retirement income, early exhaustion of retirement savings principal, or both. Annuities allow retirees to transfer market risk to the insurance company.

Annuities can also protect you from outliving your income in retirement by decreasing your need to make financial decisions late in life. "We're all vulnerable to the challenges of old age," says Jack Dolan, vice president of the American Council of Life Insurers. Many consider annuities a form of cognitive decline insurance since the amount, timing, and management are handled by the insurance company.

Remember--not all annuities are alike. For example, some annuities provide a family benefit, beyond one person's life, whether a joint benefit or a death benefit. Your need for an annuity will also depend on your other sources of retirement income, such as Social Security, required minimum distributions from retirement plans, and other sources of regular income. So, confer with a financial professional before investing in an annuity. 

Whatever your asset mix is, all retirement income planning comes down to one thing: reliability of income. The protected lifetime income of an annuity can free you to focus less on financial concerns and more on enjoying your golden years to the fullest. 

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License #: 5146997 / Reprint Licensee: Mark Sharp