by Robert Messinger
With the economy seemingly in free fall and our leaders out of ideas, retirement planning has become more complicated and challenging than ever before. As I write this post, the specter of an unresolved debt ceiling looms large, fraying the nerves of everyone from central bankers to politicians to Social Security recipients. Some pre-retirees and retirees may ask themselves, “What, if anything, can I do to protect my wealth from an economic downturn? Should I even bother looking for safety in this current climate?”
Answers to these questions aren’t easy to come by. However, that doesn’t mean you should stop planning your ideal retirement. Now may be the perfect time to rethink your risk exposure and rebalance your portfolio to include more safe money assets, such as fixed index annuities.
Once shunned by many financial pundits and retirement planners, annuities have emerged as a viable option for retirees seeking greater financial security and peace of mind. Dr. Wade Pfau, arguably the most prominent modern retirement researcher, devotes much of his time and effort to studying the benefits of annuities and other safe money vehicles for pre-retirees and retirees. Dr. Pfau’s scholarly examination of annuities informs much of current retirement portfolio design theory.
Here are a few expert insights Dr. Pfau and other retirement specialists give when recommending that seniors look deeper into annuities.
- Annuities may help supplement Social Security and other income sources. An annuity can provide a guaranteed income stream for life or a specific period. This feature gives retirees an additional consistent income source they cannot outlive.
- Certain types of annuities protect against market risk. Annuities can shield retirees from the ups and downs of the financial markets. The income payments are unaffected by market volatility, providing stability during uncertain times.
- An annuity may buffer against outliving your savings. An annuity can help you address the issue of longevity. As life expectancies increase, having an annuity in your retirement mix ensures you will have income, even if you live longer than expected.
- There are potential tax advantages with annuities. Taxes on earnings grow deferred until you start taking withdrawals, making for greater tax efficiency. Contributions made to specific kinds of annuities are made with pre-tax dollars. If you’re considering an annuity, consult your financial advisor or tax professional to ensure you understand all the nuances of annuity taxation.
- Having an annuity contributes to portfolio diversification. Most financial advisors recommend diversification to reduce risk to your wealth. When you include an annuity in your retirement matrix, you diversify your income sources beyond traditional assets such as stocks and bonds.
- An annuity can facilitate legacy planning. As an estate planning tool, an annuity can provide a predictable income stream for your beneficiaries after you pass. If you want to ensure your loved ones are cared for financially, an annuity can help you do that.
- Annuities can increase financial discipline. Because of their structured payment schedule, annuities may help retirees develop wiser spending habits. Annuities encourage financial discipline. Retirees with annuities in their plans tend to make fewer impulsive money decisions and are less likely to overspend.
- Inflation protection. Some annuities offer inflation protection options, meaning payouts increase over time to offset the rising costs of goods and services. This feature could help you maintain your purchasing power throughout your retirement.
- An annuity may simplify cash flow management. When people retire, they often prefer greater simplicity and less complexity in their financial lives. An annuity may simplify cash flow management since it offers a predictable stream of consistent income. As Dr. Pfau observes, such simplification can enhance a retiree’s financial and emotional well-being by eliminating the need for intricate withdrawal strategies. An annuity may reduce stress by reducing anxiety over investment performance and market fluctuations. By establishing an income foundation with annuities, retirees can focus more on enjoying their retirement years and less on monitoring their investments.
- Annuities may buffer against the “sequence of returns” risk. The sequence of returns risk, also known as the “sequencing” risk, refers to the possibility that a retiree will experience poor investment returns early in retirement. Sequencing risk can seriously impact the sustainability of your retirement portfolio and is a significant contributor to seniors running out of money in retirement. Dr. Pfau and others advocate for annuities to protect against sequencing risk. By utilizing an annuity to cover your basic expenses instead of pulling from other accounts, you can mitigate some of the impacts of poor market performance in the early years of your retirement.
Summing it up: The research of Dr. Wade Pfau and others in the retirement field underscores the value of annuities in creating a solid retirement blueprint. Although annuities may not suit everyone, they can offer many Americans a reliable income source to supplement Social Security, pensions, and other retirement accounts. An annuity can also help mitigate many threats to retiree wealth, such as longevity risk, market volatility, and sequencing risk. Adding an annuity to your retirement plan design could enhance your peace of mind and increase your financial security. However, you must consult an annuity expert and consider your unique circumstances, risk tolerance, and goals. Annuities are exceptional tools, but you’ll want to carefully evaluate all your options before making any decisions. Please contact me if you’d like an honest second opinion on any annuity or other safe money product you are considering. I am always happy to help.
