What’s your greatest retirement concern? Whether it’s inflation, health issues, or even the challenge of staying engaged in retirement, these are all valid considerations. However, the most common concern among pre-retirees is the possibility of outliving their savings. Without sufficient funds, other retirement concerns can become more challenging to manage. Therefore, a key priority in retirement planning is to mitigate the risk of running out of retirement funds, especially as we live longer, healthier lives.
Greatest Retirement Fears (%)
45 32
Outliving my savings and investments
42 39
Social Security will be reduced or cease to exist in the future
41 35
Declining health that requires long-term care
35 28
Possible long-term care costs
32 28
Losing my independence
31 28
Cognitive decline, dementia, Alzheimer's Disease
30 20
Not being able to meet the basic financial needs of my family
25 14
Lack of access to adequate and affordable healthcare
Since the risks are so high, we should consider every tool at our disposal. The primary instrument we use to prepare for retirement is the stock market. Using our retirement accounts, we purchase ETFs, mutual funds, and other investments with a focus on long-term growth. However, in retirement, a market downturn can easily wipe out years of growth in just a few days. Simply put, there are no guarantees in investing, but that doesn’t mean there aren’t ways to guarantee future income streams. This is where annuities come into play, offering a solution that can provide the security of guaranteed income streams in retirement.
The Role of Annuities in Retirement Planning
Annuities are contracts (not investments!) between you and an insurance company, where you make either a lump sum payment or a series of payments in exchange for regular disbursements that begin either immediately or at some future date.
Guaranteed Income
Just as life offers few guarantees, a return on your investment is seldom assured. Annuities, however, are contracts and operate much differently than investments. Unlike investing, where your savings might fluctuate based on market performance or dwindle from withdrawals and expenses, annuities can provide a stable, reliable source of income when you need it the most, bringing vital peace of mind knowing you’ll receive regular payments regardless of what happens in the financial markets.
However, that doesn’t mean annuities don’t carry any risk at all. The guarantee of an annuity depends on the financial strength of the issuing insurance company. If the company faces financial difficulties, your payments could be at risk. Also, the purchasing power of your annuity’s income could decrease over time as the cost of living rises. To help mitigate inflation risk, inflation-protected indemnities can be used, though they may come with additional costs.
What Is Your Greatest Retirement Fear?
Longevity Risk Mitigation
Creating a withdrawal strategy in retirement is complex enough. What makes it even more challenging is the unpredictable variable of longevity. Since none of us knows exactly how long we’ll live—yet we naturally aim for a long life—we’re forced to make an educated guess and base our withdrawal strategy on that. For example, if you plan for your savings to last until age 90 but end up living to 100 (or longer!), you could end up facing significant financial struggles.
Annuities can address this issue by providing a guaranteed income for life, effectively eliminating the worry of running out of money in your later years.
Protection Against Market Volatility
After years of saving and investing, many retirees find themselves in a precarious situation, with much of their assets still exposed to market fluctuations. While many do reallocate their funds into safer, more conservative assets to maintain growth and keep pace with inflation, a market downturn can still quickly erode savings, potentially taking years to recover—if recovery is possible at all.
Once you purchase a fixed annuity, your funds are no longer exposed to market fluctuations. In exchange, you won’t be able to take advantage of market opportunities that can drastically grow your savings. However, there are annuities that provide growth that is more aligned with market returns.
Variable Annuities invest your money in a selection of mutual fund-like accounts, with your returns directly tied to the performance of those investments. As a result, your income during the payout phase can fluctuate based on market performance.
Indexed Annuities offer returns linked to a specific market index (like the S&P 500) but typically have a cap on gains and a minimum guaranteed return. They provide limited upside potential in exchange for downside protection.
Customization of Annuities
Unlike a stock or bond, annuity contracts are highly customizable. For example, if health costs are a major retirement concern, you can tack on a ‘long-term care’ rider to your annuity that will provide additional financial support if you require extended care. You can also diversify your holdings by purchasing various types of annuities tailored to different financial needs and timelines, allowing you to stagger income streams and mitigate risks related to inflation or changing circumstances.
In Conclusion
The fear of outliving your savings is a very real concern for many, and with new technologies that promise even greater lifespans, it’s a concern more relevant than ever. While the stock market has traditionally been a trusted tool for long-term growth, it also comes with inherent uncertainties, especially as you transition into retirement and into the later stages of your life.
Annuities offer a unique solution by providing guaranteed income, potential protection against market volatility, and customizable options to address specific concerns like healthcare costs and inflation. Are they the perfect solution? Probably not. But they can be a valuable addition to round out your overall retirement strategy.
As always, personalized advice is key, and we encourage you to consult with retirement planning specialists to tailor the best solutions for each individual’s unique situation. If you’d like to discuss how annuities could fit into your clients’ retirement strategies, don’t hesitate to reach out. Together, we can work towards creating a more secure financial future.
