When considering retirement, an obvious truth is that your approach should be different based on your age. In your 20s, 30s and 40s, you should be automatically putting money into your retirement account and pretty much ignore what the market is doing. You shouldn’t be too worried about what the level of the stock market is because you will benefit from so-called dollar-cost averaging, which over time allows you to buy into the market at a low average cost.

A man holding a card in cupped hands with a hand written message on it, Future.
You may not be able to predict the future, but you can feel a lot more confident about it.

As you get closer to retirement, you must begin to figure out how much income you will earn from various sources to allow you to support your lifestyle. At this stage, individuals become very aware of exactly how much money they have and their behavior changes as a result. For instance, it’s normal to get nervous – or even panic – when the market crashes if it directly affects your living circumstances.

What happens when you ignore guaranteed income

Market fluctuations also demonstrate that much conventional retirement planning is flawed. Here’s an example:

If you have saved $1 million, your advisor might calculate at one point that there is a 90% likelihood the money will last you through age 95. That’s not too bad.

But say the market collapses and your savings are reduced to $800,000 – and now you have a 90% likelihood of your savings lasting to 87. Can you wait for the market to rebound or will you have to figure out how to adjust your annual expenses? Or like most investors, will you take some of your investment out the market?

You may not have to change your behavior or worry about up-and-down probabilities if you have invested a portion of your portfolio in income annuities – either immediate or deferred. An annuity adds guaranteed income to your portfolio, so that no matter what the stock market does, you know spendable cash will be deposited into your account every year.

The benefit of an income annuity

With an immediate annuity, you pay a lump sum and start getting a guaranteed annual payment which, in combination with Social Security, any pension, dividends and interest from savings in stocks and bonds, provides income to cover your living expenses.

A deferred income annuity, which you can buy at a steep discount before or in early retirement, will provide extra income starting at your second retirement age – at 80 or 85 – when you can anticipate added costs for home health care and medical expenditures.

With the protection of income annuities, you cover your basic expenses as well as the higher costs late in retirement. Any money in the stock and bond markets also provides income, and the value of the portfolio becomes part of your legacy to your children, grandchildren or your favorite charities. This means that the people and organizations who stand to inherit your money – not you — take the “risk” of the market.

And that also describes a plan that allows you to enjoy retirement and stop worrying about what the stock market does.