In the past, individuals entering retirement could reasonably rely on a number of potential sources for the steady income needed to maintain a decent standard of living in the golden years. Company pensions, a well-funded Social Security program and personal savings, including home equity were the foundations of most retirement plans. Today, the landscape has changed drastically.
A New Reality
Fewer employer pensions: Over the past several decades, many employers have changed from the defined benefit contribution plans. A survey by the Bureau of Labor Statistics, published in 2013, found that only 26% of civilian workers in the U.S. participated in a defined benefit plans.
Social Security is a “pay-as-you-go” system, with current workers supporting those already receiving benefits. As the baby boomers start to retire, the number of individuals remaining in the workforce to support them grows smaller. Although politically unpleasant, fiscal reality may force payroll taxes, reductions in benefits, or both. Many are starting to question if Social Security will even be around after 2033.
We’re living longer: A child born in 1900 had an average life expectancy of 47.3 years. For a child born in 2011 however, average life expectancy had increased to 78.7 years, according to the National Center for Health Statistics. Extended life spans mean that the money has to last longer, although exactly how long is unknown.
Now, individuals must rely on a very different thought process and not count too heavily on employer pensions and Social Security. Today’s future retiree must accept a higher degree of personal responsibility for both accumulating and managing the assets needed to pay for retirement. And managing these assets occurs in a world where constant inflation, fluctuating interest rates and unpredictable financial markets are a fact of life.
A Reliable Retirement Income
Life insurance is designed to help solve the problems created when someone dies prematurely. An annuity, on the other hand, is designed to protect against the possibility of living too long and is something to consider when working to secure a reliable income stream for retirement. There are a few types of annuities to consider when this is an objective.
An “immediate” annuity is a contract between an individual and an insurance company. In exchange for a single, lump-sum premium, the insurance company agrees to begin paying a regular income to the purchaser for a period of years or for life. The payments depend on a number factors:
Premium paid: Generally the larger the payment, the larger the income stream.
Age: Older individuals typically receive larger periodic payments.
Payout period selected: A shorter payout period usually results in a larger payment.
Underlying investment: Generally, either a fixed or a variable annuity.
A fixed annuity pays a fixed rate of return. The insurance company invests in a portfolio of debt securities such a mortgages or bonds and pays out a fixed rate of return. Generally, this rate of return is guaranteed for a certain period of time after which a new rate is calculated. Most insurance companies offer a guaranteed minimum rate throughout the life of the contract. Such guarantees are based upon the claims-paying ability of the issuing insurance company.
A variable annuity offers the potential for higher returns in exchange for assuming a higher level of risk. You can choose from among several types of investment portfolios, such as stocks or bonds. The amount of each annuity payment will fluctuate depending on the performance of the underlying investments. Variable annuities are long-term investments designed for retirement purposes. They have certain limitations, exclusions, charges, termination provisions, and terms for keeping them in force are sold by prospectus only.
The FDIC or any government agency does not insure annuities. Since an annuity may be payable far into the future, dealing with a financially solid insurer is essential. Credit rating companies such as A.M. Best, Standard and Poor’s or Moody’s can provide an objective measure of a firm’s financial stability. For many individuals, an immediate annuity can form an important part of their retirement income planning. Because an immediate annuity is a complex product, the advice and guidance of a trained professional is highly recommended.
While retirement planning has changed over the past decades, with some knowledge and guidance a comfortable retirement can be secured. One thing is certain, the sooner you start saving the better off you will be in the future.
This information is for educational purposes and should not be considered specific financial, tax or legal advice. Always consult with a qualified advisor regarding your individual circumstances. Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser.
Brad Zucker, RFC® is the president of Safe Money Advisors, Inc., a Las Vegas-based independent financial advisory firm. He blogs on personal finance every Monday for the RJ. For more information visit www.SafeMoneyAdvisorsNV.com or connect with him viaFacebook and LinkedIn.