An annuity can offer a guaranteed source of income in retirement that can help you both close a retirement income gap or simply provide a stable source of funds in your post-work years.
Quick takeaways
How confident are you in your ability to create a retirement income plan that helps with future unknowns? If you’re like more than a third of Americans, the answer is “not very” or “not at all.”
One thing that can help increase your retirement confidence is including a source of guaranteed income, like an annuity, in your planning. Often under-utilized, annuities are a way to create a guaranteed retirement income stream that fits your needs and goals. Here’s how an annuity might fit into your retirement income plan.
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To find gaps, add up all your sources of retirement income, both variable and guaranteed.
Variable income sources may include current or future work plans in retirement as well as withdrawals from savings or retirement sources like a 401(k) or IRA. But variable income income is just that: It may change from month to month based on several factors, such as how the markets are doing.
Guaranteed income is money you can rely on—generally the same amount, year to year, and throughout the length of your retirement or term of annuity. It typically comes from three sources: anticipated Social Security, a pension, and an annuity.
Add both variable and guaranteed retirement income sources together, and compare them to your projected monthly retirement expenses. If your expenses are higher than your guaranteed income, then you have a retirement income gap. Here’s a simple example: If your expenses might be $3,000 a month, and your retirement income is projected to be $2,375 a month, you have a retirement income gap of $625 a month.
Having that gap, or believing that your retirement savings aren’t quite enough, is more common than you might think: Only 50% of those older than age 60 say their retirement savings are on track.
If you have a retirement income gap, you may want to create more sources of guaranteed retirement income that you can control. That’s where an annuity can come in.
An annuity acts almost like a pension: You fund it—typically over time or with a one-time amount—and then once you decide to annuitize, you receive a guaranteed monthly amount. It’s a way to build certainty in your retirement budget.
Of course, annuities aren’t just for people who want to cover a retirement income gap. Some may just want to guarantee a certain amount of income in their post-work years.
One note about using your annuity in retirement: If you don’t need annuity payments until a later date, you may be able to defer them, if the annuity was funded with after-tax dollars. If your annuity was funded with pre-tax dollars, they’ll be subject to a required minimum distribution.
Annuities don’t have to replace other retirement accounts. Instead, many people use them alongside Social Security and savings to create a more balanced plan. A key is choosing an option that fits your goals, comfort level, and timeline.
Your tax advisor or financial professional can help you help decide if an annuity might be right for your retirement income plan. Don’t have a financial professional? We can
