Money you need to live on during retirement should not be invested in high-flying stocks or mutual funds that can fluctuate with the performance of the market. Although you may be tempted when you see a stock like Netflix or Facebook more than double in less than a year, you should also remember that today’s winners can quickly become tomorrow’s losers. When you need income, you need certainty.
Safe Money vs. Risky Money
It is especially important to understand the difference between the money you need for income and the money you can invest to try and grow your net worth. Your safe money – the money you need to produce income when you are retired – should not be put at risk. Once you are able to secure a sufficient stream of income to live comfortably during retirement, you can then use additional funds to make riskier investments that might help you meet other financial goals.
Is There Such a Thing as Guaranteed Income?
We all know that there are very few things in life that are guaranteed. There are no guarantees that you will earn a positive return when you buy stocks, bonds, gold, or even a house. When you consider your income needs for retirement, you face a dilemma. How can you get the income you need without taking undue risk? CDs are safe, but in today’s interest rate environment, they do not provide the return you need. Stocks and mutual funds have been doing very well of late, but you never know when they can decline in value. One of the best alternatives to low paying CDs and risky stocks and mutual funds are fixed indexed annuities with guaranteed lifetime income riders.
Generating Lifetime Income
If you do not want to outlive your money after you retire, you have to take steps now to assure you will receive a monthly check even if you live to 100. As Jack Marion pointed out when he authored the Advantage Compendium, your retirement can be funded by several different sources.
Non-guaranteed lifetime income sources include such things as:
- A structured withdrawal strategy
- A bond or CD ladder
- Target Date funds
While you may be able to achieve your goal using one of these sources, there is no guarantee that you will generate sufficient income or that it will last you for the rest of your life.
Guaranteed lifetime income sources include such things as:
- Government Social Security payments
- Pensions you receive from your employer
- Annuities sold by insurance companies
Every month you can count on the check from Uncle Sam, but that is not enough for most people to provide for a comfortable retirement. Fewer and fewer employers are offering pensions ( 401-K plans are more affordable for employers). That leaves annuities.
Finding the Sweet Spot
Fixed indexed or equity indexed annuities with guaranteed lifetime income riders are an excellent choice for someone who does not want to be exposed to the downward swings in the stock market, wants to earn a greater return when the market does well, and wants to ensure that they will receive guaranteed income for the rest of their lives.
Your principal is never at risk and you are guaranteed a minimum rate of return each year during the accumulation period. Plus, when the index (such as the S&P 500) rises, you receive a higher rate of interest that increases the accumulated value of your annuity.
A deferred annuity that is tied to an index gives you a better return than low paying CDs and more safety than a risky stock market. You have certainty, safety and some growth all wrapped up into one financial product. While there are other ways to generate income during your retirement, none can offer all of the things that deferred indexed annuities with guaranteed lifetime income riders provide.