Annuity–The Right Retirement Decision

Many were poor before being rich.  It is even worse being poor after you’ve been rich—as too many people are learning.  Retirement can be full of worries if one does not have enough funds to live rest of the life in a dignified way. 

Money can help decide whether a person can be able to live his/her retirement life freely or not.

Growing old is not an option.  We don’t have a choice.  But we do have choices that will greatly affect our quality of life for the rest of our life. 

That in a nutshell is how to make the right decisions regarding our resources to maintain a retirement lifestyle similar to the one we have grown comfortable with during our income-producing years of employment. 

There’s much more to retirement planning than accumulating a large next egg. You’ll need to invest and protect your retirement savings, account for health care expenses, and turn your savings into a stream of income.

Because once we retiree our income stops coming, but, our expenses remain as it is and in some cases it rises with the rising inflation. Inflation for retirees is greatest because of they incur larger medical, dental, eye, hearing and other service expenses.

Today, people are living longer thanks to modern medicine and advances in nutritional research and while this is great in a sense, it means making your retirement planning count much more as your nest egg needs to sustain you for a longer period of time.  

The 100% Rule: you may have heard that once you retire you’ll be able to live on 70-80% of your pre-retirement income. However, considering medical costs are rising and life spans are increasing, I’d rather plan that you’re likely to need 100% of your pre-retirement income in retirement just to be on the safe side.

In 1982 a cultural financial shift took place.  Corporate America began doing away with defined benefit pension plans by introducing self-directed 401(k) retirement accounts to their employees.  Essentially, companies started unloading the burden of employee retirement savings off their own backs and onto the backs of their workers.

Instead of looking forward to a monthly pension check from their employer upon retirement, employees were now faced with the responsibility of first saving enough money, and second, investing it wisely so that eventually this account would sustain them throughout their retirement years, or what we can refer to as a 20 to 30 year period of unemployment.

As a result, millions of Americans began turning to Wall Street crowd of stockbrokers for a little help and guidance and came face to face with an industry that was far more concerned about the next commissioned sale than offering prudent, intelligent investment advice. 

Unfortunately, for much of the 1980s and 1990s this problem was masked, largely because the stock market generated returns during this period almost twice that of its historical long-term average. 

The good times of great returns came to a screeching halt in the spring of 2000 when the stock market bubble burst and companies like Enron, WorldCom, and Arthur Anderson’s houses of cards fell down.  

What Is a Bubble, exactly? In the simplest terms, a bubble is an overheated market in which there are too many buyers who are too keen to buy. As a result, prices rise way too fast, and this situation becomes unsustainable. Eventually, some people realize this and start to sell out. The whole process goes into reverse equally rapidly, and the bubble bursts, with people selling in panic so that prices plunge. Particularly those who entered the market late in the process suffer substantial losses.

The majority of people got rocked pretty bad during the meltdown. 401(k) accounts plummeted, and investors started realizing they needed to get serious and start making smart decisions about retirement planning. 

Savers generally benefit from regular deposits in volatile markets so that they effectively are buying more shares when the market is low and less shares when the market is high.  Dollar cost averaging is just the thing needed to make a greater return.  The poor retiree is forced to do just the opposite and so loses return. 

Sound concepts for saving and investing elude the vast majority of people.  Even the government does not do well for the Social Security System.  You and your employer are each docked 6.2% for a total of 12.4% of your wages.  If you are not saving at least that much in addition yourself, then it is unlikely that you will adequately supplement Social Security.

Guaranteed sources of retirement income include Social Security payments, pensions, and annuity payments.  Principally, an immediate annuity can help ease the concerns people may have about managing a diversified investment portfolio or, even more frightening, of outliving their assets.

While most working Americans get their income from a single source, retirees shouldn’t count on any one income stream.  When you purchase an immediate annuity, you make a single lump-sum payment and set the starting date for the payout to begin sometime within 13 months. The term and the amount you’ll receive are determined by the annuity contract.

Immediate annuities can be understood as a money management tool which allows you to invest a portion of your savings for monthly payments that you will receive either for rest of your life or for a specific period of time that you have decided. The only disadvantage with immediate annuity remains the fact that you cannot withdraw any cash in case of unforeseen emergency.

With an immediate annuity, you control the term: You can choose income for your lifetime (known as a life annuity) or for your lifetime and that of another person (known as a joint and survivor annuity). You can also add a guarantee period to a lifetime income payout option, under which your beneficiaries will receive the payments remaining in the guarantee period should you die before the end of the period. You can also choose between time-specific or amount-specific payout possibilities.

There are certain advantages offered by an immediate annuity that can make it an attractive choice for retirement income. Anyone who expects a lump sum pension or 401(k) distribution might consider an immediate annuity as a way to convert their funds into a stream of income they can’t outlive.

Annuity income or guaranteed lifetime income from annuities help to mitigate the loss of purchasing power from inflation risk. For the many retirees on a fixed income, the real value of fixed income declines inexorably after retirement. Setting a later maturity date for annuities can give the income boost necessary to sustain the real value of retirement income for a while longer.

In several instances, having your annuity mature at the earliest opportunity may not be the best option. You might yield higher annuity benefits and reduce retirement risks by delaying receipt of annuity benefits.

A major benefit of taking your annuity later than sooner is the higher annuity benefit. This, in turn, reduces longevity risk. The erosive effects of taxation and inflation work against both your retirement savings and retirement income. While immediate annuities do not have a maturity date, the date of purchase is effectively the date of maturity. Immediate annuities can assist with reducing taxation and some can provide income that is linked to market performance.

Most people understand the importance of diversifying their financial portfolio, but when it comes to deciding how to convert their savings into income, many need advice to ensure they are making wise choices.