Addressing today’s retirement spending complexities with protected lifetime income
Unlike many retirees of the past, today’s retirees face the daunting prospect of spending from an investment nest egg to fund a lifestyle in retirement, given fewer and fewer individuals have an employer-provided defined benefit pension plan.
Estimating how much a retiree can safely spend from their nest egg isn’t easy. After all, none of us know how long retirement will last, and we don’t know the returns that can be earned from our investments in the future.
Imagine running a race without being able to see the finish line. Should the runner sprint from the start when the race could be a marathon? Exhausting yourself far from the finish line is a sure way to run out of steam too early. On the other hand, a runner who is too conservative will be left behind.
What if there was another option that allows the runner to set a brisk pace early but protect themself if the race turns out to be longer than anticipated? Financial engineering allows today’s retirees to spend the money they’ve set aside to live well in retirement without the fear that their nest egg will collapse before reaching the finish line. Instead of trying to estimate the right pace of spending in retirement without knowing how long retirement will last, a retiree can spend more freely early in retirement while insuring against a loss of income later in life. This protection is made possible through the use of risk pooling—a risk management process utilized by insurance companies that serves as the financial foundation of the annuity.
When planning for retirement, all retirees should consider what they want to achieve with the savings they’ve carefully built over a lifetime. Is the goal to pass the savings on to others? Or is the goal to fund a particular lifestyle? If the goal is to fund a lifestyle, how can a retiree use their accumulated savings to create a satisfying retirement free of the worry of outliving their money?
To learn more about the important psychological benefits of discretionary spending early in retirement—and the value protected lifetime income from an annuity may add to one’s enjoyment of retirement—download the complete article.
Annuities are long-term insurance products designed for retirement. Earnings are taxed as income upon withdrawal. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may reduce benefits available under the contract as well as the amount available upon a full surrender. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply. If you fund your IRA with an annuity, you should realize that these types of retirement accounts are already tax-deferred. An annuity provides no additional tax deferred benefit beyond that provided by the retirement account itself. You should only use an annuity in a retirement account if you want to benefit from features other than tax deferral. Please consult with your financial professional and tax advisor regarding your individual situation. Guarantees are backed by the claims-paying ability of the issuing insurance company.