Retirement savings used to come in three basic forms: Social Security, company pensions and individual savings. Today, very few companies, if at all, provide pension schemes although the lifespan of an average person has increased slightly during the recent decades. In short, retirement is not as easy as it used to be and it cannot be taken lightly. There is definitely much more risk of running out of money at some point during retirement.
So how can you avoid outliving your retirement savings? Finance experts find an answer in annuitization, which is the process of converting part of your savings into a consistent income. Thanks to annuitization, your monthly pay won’t be missed as much.
The benefits of annuitizing your retirement savings are many. First, it offers a way to reduce the usual risks associated with savings. In the case of inflation, you savings alone will not help to deal with escalating prices. Even investments come with some risks, ones that are very hard to predict. Without the help of pension programs, any efforts to mitigate such risks or face financial challenges may be counter productive. Annuitization can step in at such a time because it never runs out. It also allows you to invest your other assets to try and beat inflation. Even if a bear market looms in the distance, you need not move the stocks in your portfolio because of your consistent income.
The psychological benefits of getting a predictable income at retirement are very important to overall health and should not be brushed off. People who receive annuities tend to show fewer symptoms of depression. A 2004 survey reveals that, at any income level, even maintaining a small percentage of your retirement savings as annuities translates into ‘more money’.
To stay on top with your retirement savings, all it takes is the right combination of annuitized and non-annuitized assets. The ratio depends on how much money you have stored away for a rainy day and your personal plans. It’s always better to opt for a lifetime annuity pay over receiving a lump sum if that choice is available. After all, very few of us can claim to be an expert saver!
Some large companies offer an annuity feature in their 401(k) retirement accounts when it’s time to withdraw the assets. The most common form of annuitizing is through an insurance company where you can purchase an immediate or payout annuity by paying a lump sum. A fixed monthly amount is preferred by many but variable annuities are also available. It’s advisable to check around for low fees and a good reputation before making a purchase at an insurance company.
Calculating the annuity amount is based on your resources. For those of you lucky enough to receive a pension in addition to the Social Security income, it won’t take a lot of math. Simply, the more you have, the less you will need to annuitize. Conversely, if your resources are very low (under $ 100,000 for instance) an annuity is not going to make much sense. It will be more worthwhile to build that figure by part-time work or by delaying retirement. Some experts suggest that annuity should be purchased between the ages of 65 and 70.
With the pluses, there are a few minuses; losing control of your assets, being one. The deal will not always work in your favor, especially if longevity is not on your side. As with everything, annuitization will benefit you if only you make smart, informed choices.