FINANCIAL STRATEGIES GROUP
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their income in retirement (3). This
information is especially shocking since
the Social Security program is designed
to supplement about 40% of pre-
retirement earnings (4).
So it's clear there is a discrepancy
between the need to fund and maintain
a lifestyle and the ability to actually do
it. If we need to rely on our own savings
in retirement, is there a way to invest that
can guarantee income like a pension
used to? The short answer is "yes".
However, this particular investment
vehicle is often misunderstood and,
unfortunately, sometimes abused by
financial salespeople. However, when
used appropriately, annuities can be
a very useful tool for guaranteeing an
income in retirement. Annuities are
inherently complex investments, and
they come in many different 'flavors,' so
it is important that you fully understand
the annuity you are considering and that
you're working with a fiduciary financial
advisor who can explain the pros and
cons to you. There are three ways you
can utilize an annuity in your retirement
savings. During the accumulation phase
of your life (when you are still saving
money) you may look at an annuity, which
is invested in the stock market but can
later be turned into an income producing
contract. As you near retirement, you
may consider a fixed annuity. Fixed
annuities work a lot like a CD where the
money is not accessible for a few years
but earns a competitive interest rate
guaranteed by the issuing company.
Lastly, in retirement, you can utilize an
income annuity to act as your pension by
producing a guaranteed income.
The fixed annuity option is good for
those individuals who only have a
handful of years left before retirement
or those who may have more time but
are uncomfortable with investing in the
capital market. With a fixed annuity,
you are committing a portion of your
net worth to be invested for a period of
time (typically at least a couple of years),
and in return, you are guaranteed
to earn an interest rate during that
time. The interest you earn on these
policies grows tax-deferred until you
make withdrawals, even if you use
after-tax money to purchase them. It is
important to be aware of where interest
rates are as a whole when considering a
fixed annuity.
3 - https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
4 - https://www.ssa.gov/myaccount/assets/materials/workers-61-69.pdf
