Worried about Income in Retirement?

Retirement is based on a utopic idea that after working all your life, you can take time off and still get paid. That’s exciting! You can visit family more, travel more and do more of whatever else you want to do!

Be warned!–This new found freedom comes with a price and most people are not prepared.

It doesn’t matter what channel you watch or newspaper you read.  You might feel that with the current state of social security, medicare and the ever increasing cost of living, retirement feels like an impossible quest.

People are retiring later in life. Some of the baby boomer generation is even going back to work after “retiring” in order to pay for their basic necessities.

I often see clients panic when I start asking them about their retirement preparation. The fear of outliving their money has caused stress and anxiety.  

Since there is a chance you will live 30 years or more after leaving the workplace, wisely investing your retirement savings  is essential. One investment product that is designed for retirement income is the Annuity. 

An annuity contract is typically issued by insurance companies and entitles investors to income payments based on a variety of factors.  This post will not discuss the inner workings of an annuity.  You can find that here (3^rd party site not reviewed or endorsed by the IFS securities) 

Why Take a Risk?

Investing your retirement funds can feel like a risk, so many people opt out for a traditional annuity. You may be tempted by the guaranteed income that a traditional annuity offers. At the same time, however, you may be concerned that putting your savings into an annuity would limit your financial choices thereafter. This could prevent you from benefiting from future market growth.

Fortunately, you do not have to forfeit flexibility to obtain a measure of financial security. If the idea of combining a steady income with investment growth appeals to you, you should consider the so-called “split annuity” strategy.

The Best of Both Worlds

The split annuity strategy really is the best of both worlds. A split annuity is actually a deceiving name as it’s more of a dual annuity. This annuity is comprised of two separate annuity products.

1)  Single Premium Immediate Annuity (SPIA), which provides immediate income. 

2)Variable Deferred Annuity (VDA), which remains invested until it is needed at a later date. This allows you to get the money you need, while remaining invested to compensate for a rise in living during your retirement. When the cost of living rises your investment will grow as well. The return can allow you to remain retired without burdening loved ones or downsizing your home.

 

The split annuity can be tailored to meet an individual’s requirements. Starting with a single lump sum, you allocate a portion of the funds into an SPIA, which immediately starts to provide you with income and guarantees that these payments will continue for life, or another specified length of time. You then invest the balance of your premium into a VDA, which offers a variety of investment options with varying levels of growth potential and risk. When you wish to supplement your SPIA income, you can convert the funds in the VDA into a new guaranteed lifetime income stream. Because funds can be invested for growth through the years, VDAs generally offer greater protection from inflation than fixed-income instruments. The VDA may also serve as a fund that can be tapped in emergencies, subject to the provisions of the contract.

 

Here are three ways you and your family could benefit from a split annuity:

1. Dependable Income

You can rest knowing the immediate annuity can supplement your income by providing you with a  predictable and guaranteed cash flow.(guaranteed by the insurance company) Depending on your income needs, the SPIA can generate a stream of monthly income for your lifetime, with the payments guaranteed for anywhere from 5 to 30 years. It’s not considered a high risk investment and some consider it a “personal pension.”

2. Continued Tax-Deferred Growth

 On a fixed income, taxes become more and more of a concern. Rise in taxes can negatively impact retired individuals at an exponential rate. The VDA portion of the split annuity allows earnings to grow tax deferred. This means any growth your account experiences is not reduced by current income taxes, and could help you stay ahead of inflation. Ordinary income tax applies to earnings that are withdrawn from the annuity. As you need additional income, you can annuitize a portion of the funds in your VDA and continue to manage the remaining balance.

3. Benefits for Your Family

In the event of your death prior to the end of a guarantee period, any remaining payments due to be made on the SPIA will go to your beneficiaries. The value of the VDA will also be paid to your heirs. And, if you should pass away during a downturn in the markets, the death benefit guarantee of the VDA may pay your beneficiaries more than the current value of the investment accounts in the annuity.

 

Wrap up

Annuities can be a challenging and intimidating prospect, but hopefully this split approach clarified them a bit. This is one strategy that exists in a world of many, to accomplish retirement income longevity.

Rule of thumb: it’s smart to consult your financial advisor before you make any big financial decisions Review your goals and current situation.  The more you know and the more questions you ask, the better off you’ll be.