A Tale of Two Retirements

According to a recent survey, 84 percent of Americans say they are concerned about having lifetime monthly income when they retire. Almost half were not sure whether their current financial retirement strategies would provide that for them. Only 14 percent had purchased an annuity and 65 percent said they were completely unfamiliar with annuities.

This is disturbing in that typically the only way to guarantee lifetime retirement income  is through a pension, Social Security, or an annuity.

A big problem surfaced in the 1980s when employers began replacing traditional retirement pensions with 401(k) plans. The idea was that with the 401(k) account’s growth, all that retirees would need to do was regularly withdraw their funds. Unfortunately, with inflation, recession, and decreased interest rates, that is not the way it has worked out.

Retiring without an annuity

The traditional approach of saving money for a 40-year working life is no longer a practical retirement option. People are living longer, so an income that was planned to last for 20 years is no longer adequate for 30 or more years of retirement living.

Consider the situation of one 65-year-old man who has $100,000 in savings that he wants to turn into lifetime income. He wants to minimize his risk of loss, so he invests in 10-year Treasury bonds with an annual yield of 2 percent. If he withdraws $540 a month, his money would be gone in about 18 years. There was a time when this would have seemed acceptable. After all, his money would last until he is 83.

Now, actuaries estimate an average 65-year-old man will live until at least 86 or 87, and a woman will live to age 88 or 89. This does not account for the large number of people who live many years beyond the average life expectancy. In fact, there is a 43 percent chance that an upper-middle-class couple both age 65 will see one or both live to be 95.

With the retirement strategy he’s using, the 65-year-old man in the example above will likely outlive his money. Although it is true he could invest in a vehicle providing a higher interest rate, generally the higher the rate, the greater the risk that he will suffer a loss.

Retiring with an annuity

If our 65-year-old man takes his $100,000 and buys an income annuity, he will be guaranteed income of approximately $540 for the rest of his life, not just 18 years. That is just one option for him. He can choose from several different types of annuities, each providing benefits to meet specific individual needs. For example, other choices, in addition to lifetime payments, include:

• Guaranteed income for a set period of time: Retirees determine how long the payments should last, such as 5, 10, or 30 years. If the retiree dies before the end of the payment period, his or her beneficiaries receive payment until the end of the guaranteed time.

• Lifetime guaranteed income with period-certain benefits: If a 10-year period certain is chosen, and the retiree dies after five years of payment, the beneficiary will receive payments for another five years, until the end of the period certain. However, if the retiree lives beyond the 10-year period, the annuity will continue to make payments for the rest of his or her life.

• Joint and survivor annuity: Retirees may choose for benefits to continue after their death until the death of a beneficiary.

• Another choice, called a deferred annuity, allows owners to defer the start of the income payments. Interest credited to these annuities accumulates on a tax-deferred basis until money is withdrawn or income is paid out.

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