Is retirement right around the corner? If so, you may be in the process of planning your retirement income. If you’re like many retirees, you’ll be able to count on income from multiple sources, including Social Security, retirement account distributions and possibly even a pension.
Many retirees rely on withdrawals from their savings and investments to fund their spending in retirement. Unfortunately, much of that income may not be guaranteed. If you suffer a market downturn in retirement, or if you live longer than expected, you may struggle to generate the kind of income you need.
Fortunately, there are tools you can use to create reliable sources of retirement income. One such tool is an annuity. Annuities offer a variety of ways to generate income, sometimes guaranteed for life. Below are three different annuity strategies you can use to generate consistent, predictable retirement cash flow:
Some annuities offer regular interest payments. These tools, known as fixed deferred annuities, pay a set interest rate over a predetermined period of time. You can either let the interest accumulate or take it as a regular distribution.
Fixed deferred annuities are also tax-deferred vehicles, so you won’t pay any taxes on your accumulation until you begin taking withdrawals. Most of these products have a principal guarantee, so you also don’t have to worry about losing money to market fluctuation.
Your interest rate is determined when you open your contract. It’s locked in for a set period of time, often as short as one year or as long as several years. When the lock-in period is over, your rate is adjusted. Most contracts have a guaranteed minimum interest rate, however, so you will always know your lowest possible rate.
If you need supplemental income in retirement and don’t want market exposure or risk of loss, you may want to consider a fixed deferred annuity. You can take the interest as income and enjoy the stability of a principal guarantee.
Guaranteed* Minimum Income
Another possibility is to use an annuity with an optional rider known as a guaranteed minimum income benefit. These options are commonly found on variable annuities, which may have market exposure and risk of loss. However, guaranteed minimum income benefits are also sometimes found on fixed indexed annuities, in which you receive interest based on the performance of a market index.
With a guaranteed minimum income benefit, you are allowed to withdraw a certain percentage of your income base each year. As long as your annual withdrawal never exceeds the permitted amount, the distribution is guaranteed for life. Even if your account value falls because of market volatility, you continue to receive your income.
An annuity with a guaranteed minimum income benefit could be a suitable option if you want market exposure but also want to know that your income will last forever.
Finally, you can annuitize your annuity contract to create an income stream that will last as long as you live. Annuitization is the process of converting a lump-sum amount into a consistent income stream. The annuity provider calculates a payment amount based on your premiums, your age and other factors. It then distributes the payment to you on a regular basis for the rest of your life, or some other specified time period.
Annuitization can be helpful because it provides certainty to your income strategy. You can count on the payment continuing no matter how long you live. However, it’s important to remember that you don’t have liquidity or growth opportunity with an annuitized policy. Once you annuitize, you only have the income stream. You may want to keep other assets available for emergencies and for growth potential.
Ready to develop your retirement income strategy? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your needs and create a plan.