By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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There are many financial risks to confront in retirement, such as inflation risk, market risk and economic risk. But one of the most concerning for retirees is longevity risk, which is the risk of outliving your retirement assets. When planning for retirement, living too long can be a frightening idea, especially for those with a projected long-term outlook. Taking an inventory of your current and projected expenses can help you and your advisor develop an investment allocation strategy to help ensure essential expenses will be paid with guaranteed income sources in retirement.
Essential vs. Nonessential Expenses
When planning your retirement, it is important to make sure you have sufficient income to pay for essential ongoing, nondiscretionary expenses such as food, shelter, transportation, health care, clothing and taxes. These expenses will likely increase with inflation, and because they are necessary, it will be difficult to reduce them when you retire. Nonessential (discretionary) expenses include activities that are important to you, but not necessary, such as eating out, travel, entertainment, charity, hobbies and gifting.
Secure Income to Fund Essential Expenses
A strategy often used is to provide secure income to pay for essential expenses, and to have nonessential expenses paid from other income sources. Examples of secure income streams include social security, pensions and annuities. Employee pensions have long been an important element in retirement; unfortunately, fewer and fewer of us have employers that provide this type of benefit. An annuity can be another way to provide a pension-like income stream. Using this approach may give you the security of knowing that the most important income needs in retirement will be covered by a reliable income source.
Lifetime Annuity Income Guarantees*
Annuities are contracts issued by insurance companies. There are different types of annuities that can generate a guaranteed income stream. Deferred annuities delay access to income for a certain period of time, while an immediate annuity begins income shortly after a policy is established. Regardless of the type of annuity purchased, annuities can be structured to provide a person with guaranteed income for life, regardless of how long they live. Annuity lifetime income guarantees can alleviate risks (and stress) in retirement by adding a certain monthly income stream to social security and pension income.
There are a variety of investment and annuity options to consider in retirement planning. Contact your financial advisor for help with an analysis of your projected expenses and potential risks in retirement, and discuss whether an annuity might be appropriate for your specific situation.
*Annuity guarantees are subject to the claims paying ability of the issuing carrier.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.