Everyone wants to make sure they have enough money to live on during retirement. In their working years, many people have some type of retirement account. It could be a 401(k) plan. Or, if you’re a school district employee, it could be a 403(b) or tax-sheltered annuity, a pension plan if you’re a government employee or a self-directed IRA if you’re self employed. Regardless, you want to make sure you contribute as much as possible and have enough saved for your retirement years. However, the retirement timeframe is getting longer.
During your working years (also known as the “accumulation phase”), you contribute directly from your paycheck to tax-deferred accounts. This consistent contribution, regardless of market fluctuation, is called dollar-cost averaging. The fact that you have a good amount of time to work and contribute to your retirement accounts means you have the time and money compound to be able to sustain losses. During this phase, asset allocation risk and growth are important.
However, in my experience working in the insurance and annuities space, the goal for most people during retirement becomes securing fixed income to make sure their money lasts for the rest of their life. The risk of loss from asset allocation in market-based accounts becomes worrisome.
When you are close to retirement or already retired, this is called the “distribution phase.” The goal of this phase is to have your money last for the remainder of your life, which could be decades. So you see, it’s extremely important to make sure you plan to secure your fixed income over this timeframe. You must educate yourself to determine in which type of account your funds can grow and last to provide, at minimum, income for all your fixed monthly expenses and possible emergencies along the way.
The problem lies in the type of account many people are using to secure their income. If your funds are left in the same qualified market-based retirement accounts (a 401[k], IRA, brokerage, etc.), your funds are at constant risk of loss, and you are knowingly or unknowingly paying a substantial amount in fees. Risk of loss and fees are the two factors that will eat into your retirement account based on your retirement timeframe and need for income. Once you retire, you are no longer contributing to your account as you are taking constant income or withdrawals. These income needs, risk of loss and fees are what you need to factor in when rethinking your retirement allocations.
Needing consistent income and emergency funds for 20-40-plus years may be a worrisome thought to most, but it doesn’t have to be. A fixed indexed annuity can help you address your retirement income needs like safety of principal, guaranteed or predictable principal growth, and lifetime income.
A fixed indexed annuity is an insurance product that allows you to get market-like returns without the risk of losing principal. It allows the policy owner to participate in a market index (such as the S&P 500), and the policy protects your funds from any market loss by giving you a no-loss guarantee. Your principal and growth are locked in every year, and if the market goes down, your principal is protected. On top of safety and tax-deferred growth, fixed indexed annuities offer lifetime income options that allow you to receive monthly income for life even if there is no principal in your account because of income use. Your policy will continue to pay you for your lifetime and possibly your spouse’s lifetime leaving the remaining balance to your beneficiaries.
Even though you have access to your funds along the way, one must remember that annuities are mostly long-term strategies. Canceling or surrendering an annuity before its surrender schedule timeframe can cause a surrender charge. Understanding that this type of retirement plan is a long-term strategy will eliminate the individuals this may not be suitable for. As long as you understand this, you will have a solid plan.
There are a number of insurance companies that offer annuities and even more choices in annuity contracts. It’s important to choose a company with a high financial strength rating (A- or better) that has been around for awhile. If you have questions, consider working with a financial professional whose expertise is specific to annuities who can help educate you on how these accounts work and which annuity is best suited for your specific situation. Also be mindful of captive insurance agents who can only sell you their company’s annuities.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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