Providing income for retirement is one of the biggest challenges American workers face in planning how they will be able to live comfortably once they stop working. One of the most popular ways to generate this income is to buy yourself an annuity. New research from investment analysis firm MorningstarHowever, it goes to show that if you manage to save a sufficient amount of money during your working years, an annuity is actually not the best option for you.
If you want help determining the best course of action for your retirement, consider this Work with a financial advisor.
annuities It is not the simplest investment to understand, so let’s start with a bit of a crash course on what it is and how it works.
Basically, an annuity is an insurance contract. You pay the insurance company a monthly premium now, and in return you get compensation later. There are two basic types of annuities – fixed and variable. a Fixed annuity It has a predetermined payout and the performance of the premiums you pay in the market has no effect. a Variable annuityOn the other hand, you will have a payout that depends on how you perform the investments made using your premiums. There will generally be a minimum payment that guarantees no principal loss, but it is possible that the money may not grow at all, which is not a concern with a fixed annuity.
When it comes time to collect your money, you’ll often have the option of paying a lump sum or annual payments. Some pensions are paid until death while others are only paid for a predetermined period of time. This is all specified when you purchase the annuity contact.
Who should and should not use annuities?
When you retire, the amount of money you make each month is likely to drop dramatically. Depending on your age, you may have it Social Security paymentsSome may have pension payments, but often you will not have income deposited into your account Bank account Like I did when I was working annuities sought to remedy that.
If you’ve saved enough money while working, an annuity may not actually be a good option, according to a recent report from Morningstar:
“In particular, if a participant’s wealth is more than 36 times the required annual retirement income (defined as the difference between annual unavoidable expenses and Social Security income), there is little room for the annuity to materially affect his or her retirement,” the report states. . “This is because high net worth participants can more or less insure themselves against longevity risks.”
According to Morningstar’s calculations, someone with 36 times the required annual retirement income will be able to fund their retirement properly 95% of the time using only a portfolio strategy. This only comes to 95.9% if you’re using the annual premium, which isn’t enough of a difference to justify using the annual premium.
The report notes that annuities are also not the best option for those who have sufficient income through a combination of inflation-adjusted pensions and Social Security.
Social Security Bridge – Another option
Morningstar also details an alternative plan to make sure you have enough money in retirement without having to purchase an annuity, a strategy known as the Social Security Bridge.
Here’s how it works: When you retire, don’t immediately apply for Social Security benefits. Instead, take out a larger portion of your retirement savings than you normally would in the first few years after you stop working.
When you turn 70, you file for Social Security. And by waiting until that age, you actually get much higher payments — more than 40%, according to the report. Once you start receiving these payments, you can reduce the amount of money you withdraw from your retirement accounts each year.
Pensions are useful retirement savings tools, allowing you to create a guaranteed income post-retirement. However, Morningstar analysis shows that if you have at least 36 times your required annual income saved at the time of retirement, you probably won’t need to take out an annuity.
Retirement planning tips
Often the best way to plan your retirement is to get professional help. Finding a qualified financial advisor is not difficult. SmartAsset Free tool It matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to determine the right one for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.
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