As the life expectancy of retirees continues to expand, annuities are playing an increasingly important role in retirement planning. Historically, retirement planning has emphasized the accumulation of assets as the strategic objective of the retirement plan. More recently, as more retirees find themselves reaching retirement with inadequate assets, the emphasis has shifted to finding ways to convert assets into an income source that cannot be outlived. A sound retirement plan should have elements of both strategies to ensure a secure and comfortable retirement.
In planning for the accumulation and distribution of retirement assets, several factors need to be considered in order to arrive at an effective and enduring retirement solution. The factors and assumptions used in the initial planning stage, must be reviewed regularly in order to make the necessary adjustments to the plan as circumstances change.
Retirement Planning Essentials
Set Realistic and Definable Goals
Without a specific target, it is impossible to know where to aim. Accumulating retirement funds without a well-defined income goal is like shooting in the dark. The goal needs to be quantified so that the right amount of savings can be applied, and, so the progress towards the goal can be measured. A retirement income goal should take into account life style needs, increased medical expenses, and inflation.
Know Your Risks
For most people, achieving a secure retirement is their most important goal. As such, many people are reluctant to assume a lot of risk when it comes to investing their retirement funds. While it is true that investing funds in the stock or bond market presents the risk of loss, inflation presents an equally great risk in terms of the loss of purchasing power of a long period of time. A well-balanced, diversified retirement portfolio, invested over time, will mitigate both risks.
Create a Diversified and Balance Investment Portfolio
No matter your retirement time horizon, the only way to ensure that your assets grow sufficiently to provide an adequate retirement income, is to keep them diversified and balanced among different asset classes in order to reduce risk and increase stability.
Some combination of growth investments, income investments and ultra-safe fixed yield investments are needed to create long term stability. The closer you are to retirement, the balance can be shifted to emphasize income and ultra-safe investments; however, it is important to have a portion of your assets in growth investments to combat inflation.
Using Annuities as Your Income Foundation
A sound retirement portfolio will consist of several different asset classes and types of investment vehicles. And, while the right mix can produce solid, stable returns over time, investors should consider building a retirement income foundation which, even if sufficient returns aren’t achieved, will produce the base income needed to ensure a comfortable retirement.
The unique characteristics of annuities provide investors with an opportunity to add stability and predictability to their retirement portfolios. The added guarantees and safety that annuities bring to the mix comes without having to sacrifice investment returns, because they offer the same rates of return found in bank CDs, and other equivalent investments.
Here are some of the ways annuities form a solid foundation for your retirement income:
For investors in the higher tax brackets, tax advantages are the key to accumulating assets more quickly and maximizing income at retirement. The earnings in annuity accounts are not currently taxed, which can increase the rate at which your funds will grow. While, the earnings are taxed as ordinary income as they withdrawn, the tax can be deferred even longer when the annuity is annuitized, or converted to income. At that point, only a portion of your income payment is taxed because it includes a return of your principle which is not taxed.
Annuities come in many flavors which means you are able to maintain a proper mix of investments while building your retirement foundation. Fixed annuities provide a guaranteed return with absolute safety. Variable annuities enable you to allocate your funds for diversification and balance for the potential of stable, higher returns. And indexed annuities offer the opportunity to participate in gains of the market without risking your principle.
All annuities offer the guarantee of a secure income that cannot be outlived. A fixed annuity will generate a fixed income, while a variable annuity can generate an income that will increase when the markets rise. Conversely, the income will decrease when the market declines. Some variable annuities offer a minimum income guarantee (at an additional cost) which will mitigate that risk. The income from an indexed annuity is tied to the rise and fall of a stock index, but, it too has a minimum income guarantee.
The Complete Retirement Plan
Investors have several tools available to them to create a complete retirement plan. Certainly, everyone should take advantage of the qualified retirement plans that offer current tax savings, diversified investment portfolios and tax deferred growth of earnings. A well-balanced investment portfolio will form the core of your retirement assets that you will need for long term growth. At some point, when you have been able to maximize your qualified plan contributions, you should consider building the income foundation using annuities. In doing so, you will not have to sacrifice investment returns, and you will increase the stability and predictability of your future retirement income. More importantly, this foundation will ultimately generate a guaranteed income that you cannot outlive.