who needs an annuity
Creating income for retirement is one of the biggest challenges American workers have in planning for how they will be able to live comfortably once they stop working. One of the most common ways to create this income is to buy yourself an annuity. New research from investment analysis firm Morningstar, though, shows that if you’ve managed to save a sufficient amount of money during your working years, an annuity isn’t actually the best choice for you.
If you want help determining the best course of action for your own retirement, consider working with a financial advisor.
Annuities are not the simplest investment to understand, so let’s start off with a bit of a crash course in what they are and how they work.
Essentially, an annuity is an insurance contract. You pay an insurance company a monthly premium now, and in return, you get a payout at a later date. There are two basic types of annuities — fixed and variable. A fixed annuity has a predetermined payout and the performance of the premiums you pay in the market doesn’t have any impact. A variable annuity, on the other hand, will have a payout that depends on how the investments made with your premiums perform. There will generally be a minimum payment that guarantees you don’t lose your principal, but it’s possible that the money won’t grow at all, which is not a concern with a fixed annuity.
When it comes time to collect your money, you will often have the choice of a lump sum or annuitized payments. Some annuities pay out until death while some only pay for a predetermined length of time. All of this is determined when you buy your annuity contact.
Who Should and Shouldn’t Use Annuities?
who needs an annuity
When you retire, the amount of money you have coming in each month will likely go down drastically. Depending on your age, you may have Social Security payments, and some may have pension payments, but for the most part you won’t have income being deposited into your bank account like you did when you were working. Annuities seek to remedy that.
If you’ve saved enough money while you are working, though, an annuity may actually not be a good choice, according to a recent report from Morningstar:
“In particular, if a participant’s wealth is more than 36 times their needed annual retirement income (defined as the difference between annual deterministic expenses and Social Security income), there is little room for an annuity to meaningfully impact their retirement,” the report reads. “This is because higher-wealth participants can more or less self-insure against longevity risk”
According to Morningstar’s calculations, someone with 36 times his needed annual retirement income saved will succeed in funding his retirement soundly 95% of the time with a portfolio-only strategy. That percentage only ticks up to 95.9% if you use an annuity, not enough of a difference to justify using an annuity.
The report notes that annuities are also not the best option for those who have enough income through a combination of an inflation-adjusted pension and Social Security.
Social Security Bridge – Another Option
Morningstar also details an alternative plan for making sure you have enough money in retirement without having to buy an annuity, a strategy known as the Social Security Bridge.
Here’s how it works: when you retire, don’t immediately file to get Social Security benefits. Instead, take a bigger portion of your retirement savings than you’d normally take in the first several years after you stop working.
When you turn 70, you file for Social Security. By waiting until that age, you actually get significantly higher payments — more than 40%, according to the report. Once you start taking these payments, you can reduce the amount of money you take out of your retirement accounts each year.
The Bottom Line
who needs an annuity
Annuities are useful tools for retirement saving, allowing you to create guaranteed income after you retire. Morningstar analysis, though, shows that if you have at least 36 times your needed annual income saved at the time of retirement, you likely don’t need to get an annuity.
Retirement Planning Tips
The best way to go about planning your retirement is often to get professional help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/PeopleImages, ©iStock.com/VioletaStoimenova, ©iStock.com/kate_sept2004
The post If You Have This Much Money Saved You Don’t Need an Annuity appeared first on SmartAsset Blog.
Delaying retirement is one impactful way to extend the life of your retirement savings. Waiting several years – or decades – to leave the workforce can grow your investment accounts, increase Social Security benefits and reduce the number of years … Continue reading → The post Should I Delay Retirement? What the Numbers Say – 2022 Study appeared first on SmartAsset Blog.
Retired people need to stay busy and it never hurts to make extra cash, especially when you’re on a fixed income. If you’re thinking of working while retired, let’s go over some of the best part-time jobs for retirees. Here are … Continue reading → The post 9 Best Part-Time Jobs for Retirees appeared first on SmartAsset Blog.
Senators Pat Toomey, Tim Scott and Peter Meijer have just proposed a bill in Congress that would allow 401(k) plans to stretch beyond traditional investments like stocks and bonds. If their Retirement Savings Modernization Act became law, 401(k) plans could start offering not just things like commodities, but even “hedge funds,” “venture capital,” “digital assets” (laughter), and — literally–“any fund, commingled account, or pooled investment vehicle that invests in any investment.”
Amid rampant inflation, Social Security payments are set to get a hefty boost. But that boon may come with a major consequence: a gnarly tax bill. With inflation running at 8.5% after running as high as 9.1% this year compared … Continue reading → The post Will Inflation Cause 85% of Your Social Security Income to Be Taxed? appeared first on SmartAsset Blog.
As you build wealth, you increasingly become a target for lawsuits. Lawyers often see wealthy investors as “deep pockets” that can financially right the wrongs that a plaintiff feels they’ve suffered. While you can’t stop someone from suing you, you … Continue reading → The post How to Protect Your Assets From Lawsuits appeared first on SmartAsset Blog.
Like many other consumers, you probably use a checking account to manage your money and complete everyday transactions. But, too many purchases can exceed the total amount of funds in the account. If purchases exceed the balance, many banks charge … Continue reading → The post How to Avoid Overdraft Fees at Your Bank appeared first on SmartAsset Blog.
Attention, financial advisors: your next job opportunity in the finance industry could take on a new twist beyond work at a traditional advisory firm. Positions are increasingly available at banks and trust departments as executives look to expand their roster … Continue reading → The post Advisors, Your Next Job May Be Somewhere Unexpected appeared first on SmartAsset Blog.
Stocks came storming out the gates in October’s first session as if in a hurry to leave a brutal September well behind. Investors will be hoping the rally is more than a one-off after the storm of headwinds – a combination of high inflation, rising interest rates, and slowing economic activity – have hit the markets hard this year. The tech sector has been especially vulnerable. The NASDAQ closed out the third quarter with three consecutive weeks of losses and is still down 31% for the year. But
With inflation at a four-decade high, fast-rising interest rates and very volatile markets, many Americans are being forced to reconsider their retirement planning. Learn: 6 Types of Retirement Income…
Planning for retirement requires thoughtful money management and careful planning. When it comes to retirement, curious glances at what other Americans are doing to prepare are a helpful way of…
When it comes to data processing, Confluent (NASDAQ: CFLT) is reimagining the way businesses derive real-time operational decisions. The company has seen massive traction, and this video explains why Jamie is such a fan of the stock.
It’s no secret the Social Security program is in need of reform. The combined Social Security trust funds — the source of benefits paid to retirees, survivors, and disabled individuals — are on track to be depleted by 2035, according to the Board of Trustees. The number of beneficiaries who owe taxes on their Social Security checks has risen rapidly over the last few decades, and with a potentially massive cost-of-living adjustment (COLA) coming in 2023, some seniors will see a larger tax bill in 2024.
Greg Abel, who is next in line to succeed Warren Buffett as Berkshire Hathaway Inc’s chief executive, spent more than $68 million on the conglomerate’s shares last week, after selling his stake in the company’s Berkshire Hathaway Energy unit for $870 million. In four regulatory filings, Abel, 60, said that on Sept. 29 he purchased 168 Class A shares of Berkshire, each costing more than $405,000, on behalf of a family trust.
The key to gaining financial security is to set financial goals and keep re-evaluating your progress. Without working toward anything specific, you’re likely to spend more than you should without realizing, leaving you vulnerable to life’s unexpected moments. Financial planning … Continue reading → The post 2022 Financial Planning Checklist appeared first on SmartAsset Blog.