Most people looking for retirement planning advice are given pointers about how to accumulate wealth or tax planning in retirement. They might also hear about how much to save or how to distribute assets across their portfolios, but that really just scratches the surface. The reality is that Social Security isn’t enough to pay for living in retirement. Social Security benefits replace as much as $2 out of every $5 for most retirees and that ratio is even less advantageous for higher earners. In addition, pensions, that old standby of yesteryear, simply aren’t there anymore.
Savvy investors are taking action and building their own pensions through the use of annuities. Done correctly, annuities are a useful tool in planning for retirement. You get a guaranteed income and have plenty of options for customizing your annuity to suit your needs — whether that means making sure your surviving spouse has plenty to live on or that your dependents are well cared for. In other words, with the decline of private sector pensions, it’s important for Americans to shore up or rebuild the income guarantees that had been provided by the pension leg.
The Decline in Private Pensions
Private pensions have fallen in recent years. Defined benefit pensions now account cover just 18 percent of all workers in the private sector — roughly half as many people as they did in the early 1990s. Pension coverage is much higher in the public sector. In fact, almost 80 percent of public sector workers have some amount of pension coverage. Unions also tend to report pension coverage, with 67 percent of unionized workers covered by a pension. Compare this to the fact that only 13 percent of non-union private sector employees can expect a pension in retirement and the disconnect is clear.
The problem is that offering pensions frequently requires employers to take on a long-term liability. Smaller companies simply may not be able to do so while larger corporations may not want to invest so much in employees that may not be around for the long haul. Instead, 401(k) plans have taken the place of pensions in the private sector. Unfortunately, they are a poor substitute for pensions. The issue is that putting money into a 401(k) is optional and there isn’t much money to go around anyway.
Americans simply aren’t properly funded to supply themselves with a paycheck in a retirement that may last 30 years. “The typical household approaching retirement has less than two years’ worth of income saved in these accounts,” writes the Economics Policy Institute, while “median households aged 55–64 had an income of $55,000 and just $100,000 saved in a retirement account, if they had a retirement account at all.”
How to Build Your Own Pension
Pensions provided an extreme level of security in retirement — but they aren’t the only option. Annuities and defined contribution plans can help you build back some of the guarantee lost with the decline of private pensions. One of the biggest issues in planning for retirement is projecting how long you will need to provide for yourself. The average 65-year-old woman today will need 20 years’ worth of income to provide for herself comfortably. However, that is just an average. Many people will live far longer. In fact, one in three women will live until 90 or older and one in 30 will top 100. If you just used the average to plan for retirement and you were one of the lucky one in 30, you would fall short of income — about 15 years short of income.
Life annuities help to remove the risk of outliving your assets because they provide a guaranteed income stream for the life of participants. You can choose to have that guarantee for your life or to last for the length of your life or your spouse’s life, whichever is longest. Moreover, there are some advantages to an annuity over converting your retirement egg into income yourself. Even if you do manage to save enough money to last out retirement, you still may not get the same advantages of an annuity. Most notably, there are risks involved. Your assets are going to be subject to market fluctuations so the amount you can convert to income each month will vary and there is always a risk of losing everything in a bad market. None of that happens with an annuity.
Annuity Advisors Are Here to Help
Navigating the new world of retirement planning is difficult, and often, you need a trusted adviser to help. Many annuities come with high costs and smallish yields, but some are truly strong investments. You need help to know which is which. Don’t forget that insurance companies don’t offer annuities out of the kindness of their hearts. “Insurance companies have to live in the same investment market as the rest of us, and their returns aren’t what they were in the past, so the yields paid on their annuities are much lower than several years ago,” explains Kiplinger. “Still, for those requiring guaranteed income, they can do the trick.”
A dedicated annuity expert can help you navigate these waters and explain your options. Life annuities are just one type of annuity and there are several options even under that framework. An annuity advisor can help explain your options and walk you through how different annuities would work for you based on your goals and amount you have to invest.
Speak with a trusted advisor about your retirement planning today. The right person can answer any questions you have and help you structure your retirement nest egg into guaranteed income that will provide for you and yours.