Annuities: One Piece of Your Retirement Planning Puzzle

Published on Tue, 06/26/2018 - 21:18

Preparing for retirement starts with accumulating assets over your working life. How much should you save? Many experts recommend having assets equal to seven to 10 times your salary at retirement. Reaching that goal requires planning, commitment and focus.

Even with careful planning, outliving assets is the number one fear of retirees. How can you be sure that that your money will last long enough?  By making sure you have an income source that will provide benefits for as long as you are alive.

A simplified way to think about retirement income is replacing one paycheck (from your employer) with another (from your savings). There are several strategies to provide income during retirement and usually, a combination of those strategies provides the best outcome.

Planned, periodic withdrawals from retirement accounts is one strategy. Another is to invest retirement savings in equities and use the earnings, dividends and interest, to provide income. Both plans are subject to highs and lows of the market, changing account values and interest rates. A third way to provide a guaranteed monthly paycheck, of a specific amount for your lifetime, is to purchase an annuity.

Annuities: A guaranteed, flexible income solution

A retirement annuity is an insurance contract that promises the carrier will pay a guaranteed monthly benefit in exchange for premium from the customer (annuitant). There are many annuity products from fixed, to indexed, to variable. Below, we will focus on the many ways to customize a fixed annuity.

The typical annuity pays a benefit for the lifetime of the annuitant. With this type of annuity, you no longer have to wonder if your money will last as long as you do. However, annuity products are not limited to only the “lifetime benefit” configuration. The annuity period can be adjusted to provide income for a specific time period such as 5 or 10 years.

An annuity can also provide a monthly benefit to more than one annuitant. A joint annuity will continue the monthly benefit over the lifetime of two annuitants. In many cases, a joint annuity is a better fit than two individual annuities. Your advisor will recommend the best option for your situation.

Here’s an example of the flexibility an annuity can give a retiree: Consider a woman retiring at 65. She has decided to maximize her Social Security benefits by waiting to claim benefits until age 70. She needs $5,000 each month. The income from pensions and withdrawals comes to $4,000. She needs additional income of $1,000. To make up the difference, her advisor suggests a five-year certain annuity to provide the additional monthly income until age 70.

Benefits for beneficiaries

There are also annuity options that continue benefit payments to a beneficiary for a stated number of years after the death of the annuitant (called a certain annuity), and some (annuity with cash refund) may pay the beneficiary the difference between the premium paid less benefits received by the annuitant.

Other customizable options

Protecting the value of the annuity benefit during inflationary times is an important consideration. The addition of an inflation protection rider can be added to most annuities for a small fee and makes sure the purchasing power of the benefit is not diminished by an inflationary economic environment. Some products, call Hybrids, offer a long-term care benefit. Benefits are often exempt from federal income taxes when used for qualifying long-term care expenses.

This is a very brief description of annuities, really just skimming the surface, on all that annuities can do as part of a retirement income plan. Only an annuity can provide the combination of guaranteed income, inflation protection, beneficiary benefits, and cover long-term care expenses.


Talk to one of the advisors at Heffernan Retirement Services, a division of Heffernan Insurance Brokers, about adding security and guarantees to your retirement plan with an annuity.