In an article for Time’s Money Magazine, Darrow Kirkpatrick explained “Why the Right Kind of Annuity Product Can Boost Your Retirement Income.” 1 He says that having income that is guaranteed, inflation-adjusted and lasts for your lifetime is the ultimate retirement goal. Social Security provides that type of income, but it doesn’t pay enough to meet complete income needs. Although a handful of Americans have a pension, the majority have to create income elsewhere to pay for their fixed expenses. One option is to make systematic withdrawals from your investment portfolio. This can work well if you have a certain expertise in balancing your portfolio and if (and this is a big if) the markets perform at least average. Since there is risk inherent with drawing down your portfolio, using an annuity to help create lifetime income has become an important option for retirees. Annuities transfer your longevity risk to an insurance company and guarantee* that you will not outlive your savings.1
The reason that many people avoid annuity products altogether is because they are confusing and expensive. In his article, Kirkpatrick prefers the simplicity of a single premium immediate annuity.1 He uses a combination of SPIAs and stocks in his retirement strategy as one of the best ways to generate steady and reliable income for retirement. You can create an income floor during retirement with a single premium immediate annuity. That way you know that all of your fixed expenses will be paid with this income for as long as you live.* Kirkpatrick points out that everything is very straightforward with a single premium immediate annuity. You pay an insurance company a lump sum of money and they immediately start paying you a monthly income that will last for the rest of your life.1
Everyone has a different financial situation and goals, so there is no common age at which an annuity should be purchased. It is in your best interest to speak with a financial professional to determine ways an annuity product could fit in your individual retirement strategy and when you might want to purchase one.
Kirkpatrick had great success managing his investment portfolio for years, so many people wondered why he would even consider an annuity. He credits the market crash of 2008 was his reason. He claims that although he survived that crash relatively unharmed, he saw many people who did not. He saw that those people who were receiving annuity income during the financial crisis continue to receive steady paychecks.1
The timing of your retirement coupled with what is going on in the markets right then can make or break your finances without the guarantees* from an annuity product. You cannot control what is happening in the markets when you retire or how long you will live, but with the guarantees from a single premium immediate annuity as part of your retirement income, you can count on an income for the rest of your lifetime.*
Written by Rachel Summit
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*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.
1. Kirkpatrick, Darrow. “Why the Right Kind of Annuity Can Boost Your Retirement Income.” Money Magazine, July 14, 2015. https://time.com/money/3955901/retirement-income-right-annuity/
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