Planning for old age is good. That is why I like income annuities as part of a retirement plan: because they guarantee income through your entire life, no matter how long you live.
It turns out, though, one reason people don’t buy income annuities is that they don’t like thinking about old age (and especially the end of old age). Several studies that looked into why more people don’t buy these products found that the language to describe income annuities caused potential buyers to close their computers, walk away from their desks, and promise to think about retirement another day.
Emotionally, I get it. I want to live forever, too. But the evidence is overwhelming that I will have to settle for a long and happy life, not an endless one.
A two-stage retirement
I have seen too many people, by the second stage of their retirement, run out of money or dramatically downsize their lifestyle. Although Social Security checks continued to arrive every month, the income from their investments in stocks and bonds wasn’t enough to cover all expenses.
The risk of this happening increases later in retirement, when:
- Expenses are likely to increase from costs related to illness or disability, and
- Investment returns are reduced as retirees get more conservative (rightly so) in this stage of retirement.
When we worry about running out of money during retirement, we should concentrate on the risk of living, not the risk of dying.
An income annuity offers a solution
In the first stage of retirement, your income comes from savings, your stock and bond portfolio, Social Security and perhaps a pension. In the future, it may come from the equity in your house through a reverse mortgage.
In the second stage of retirement, payments from Social Security and your pension continue, but you might have spent down a large portion of your stocks and bonds, IRA and other savings.
The income for the second stage of retirement can be provided by a deferred income annuity or, as it’s called when purchased from a rollover IRA, a QLAC. It makes the most sense to purchase one from a tax-deferred savings vehicle like a deferred savings annuity or rollover IRA. The income is guaranteed and will help you cover significant expenses that come with illness, home care or home renovations to make it easier to stay in your home.
Developing different plans for the two stages of retirement creates the confidence that you will have the money to enjoy retirement (dare I say it?) for the rest of your life.
A financially secure two-stage retirement is within your reach. Learn more about how to add a deferred income annuity to your financial plan by viewing our new video.