Establish Lifelong Income: Secure guaranteed lifetime income that remains unaffected by market fluctuations.

Key Takeaways

• Ensure a lifetime of guaranteed income.

• Diversify your income streams.

• Offer a stable and dependable income.

Benefits of a Lifetime Income Annuity

In recent decades, the landscape of retirement in America has transformed significantly. With people living longer and pensions becoming increasingly scarce—only 15% of employees had access to a pension plan in 2023—there is growing concern about the sustainability of retirement funding. Coupled with market volatility and uncertainties regarding the long-term viability of Social Security, many individuals feel apprehensive about securing their retirement finances. Today, the responsibility for funding your retirement largely rests on your own shoulders.

Fortunately, there is a strategy to establish a plan that ensures guaranteed lifetime income. A lifetime income annuity offers a dependable stream of income that persists throughout your lifetime, unaffected by market fluctuations.

One advantage of securing guaranteed income is the increased flexibility it affords in investing the remainder of your retirement assets for growth within a diversified income strategy. Investors should consider an income annuity to cover essential expenses not addressed by other reliable income sources such as Social Security or a pension.

"Many individuals may not realize that once your essential expenses are covered by guaranteed income, you can attain genuine peace of mind. This enables you to enjoy retirement more fully, allowing you the freedom to spend on leisure activities," says an expert. "Additionally, you can focus on investing your remaining assets for growth, rather than being concerned about preserving and stretching your portfolio throughout your lifetime."

A lifetime income annuity is a contract with an insurance company that allows you to convert a portion of your retirement savings (an amount you choose) into a consistent stream of lifetime income.

Partnering with an insurance company can help address three key retirement risks that are typically challenging to manage independently:

• Market risk – Regardless of market fluctuations, the insurance company is committed to providing you with annual income payments.

• Longevity risk – Instead of calculating how much of your savings can be spent annually without depleting funds, the insurance company ensures payments for the duration of your life.

• Inflation risk – By opting for an annual increase option, where available, you can mitigate the risk of inflation eroding your purchasing power over time.

To manage costs effectively, it is advisable to pay for only the features and benefits necessary to achieve your investment objectives.

We will now examine two categories of lifetime income annuities: a fixed lifetime income annuity and a fixed annuity with a guaranteed lifetime withdrawal benefit.

What is a Fixed Lifetime Income Annuity?

A fixed lifetime income annuity can be an integral component of a diversified income strategy, offering guaranteed income for life, irrespective of market fluctuations. Payments can commence immediately or at a future date specified at the time of purchase. Additionally, optional features are available, such as beneficiary protection and an annual payment increase option to help your payments keep pace with inflation.

When opting for an income annuity, you typically relinquish control over the portion of your savings used to purchase it. In return, you benefit from not having to manage your account to generate income, securing a predictable income stream for life. It is advisable to consult your financial advisor about available withdrawal features on some income annuities, which may address liquidity concerns.

Fixed lifetime income annuities often provide higher income payments compared to other financial products like bonds, CDs, or money market funds, due to the "longevity bonus" they offer. Unlike traditional income solutions, which are limited to the return of principal and interest, fixed lifetime income annuities allow participation in the longevity benefits of a "mortality pool." Essentially, assets from annuitants with shorter life spans remain in the pool to support payouts for those with longer life spans. Simply put, the longer you live, the more income you receive.

Payment Options and Features

Fixed lifetime income annuities offer a range of options that provide varying income amounts, contingent on the level of beneficiary protection included. The three most prevalent payment options are:

1. Life with a Cash Refund – This option provides income payments for the entirety of your life. Should you pass away before the total payments equal your initial investment, the remaining balance will be refunded to your beneficiaries. Due to the beneficiary protection offered, the payment amount under this option is generally lower than the life-only option described below.

2. Life with a Guarantee Period – You will receive income payments for your lifetime. If you pass away before the conclusion of your selected guarantee period, payments will continue to your beneficiaries until the end of that period. Since the company commits to a guaranteed number of years, the payment amount under this option is typically less than the life-only option mentioned below.

3. Life Only – This option provides income payments throughout your lifetime. It offers the highest possible income payment as it is limited to your lifespan, with no funds allocated to heirs. The primary advantage is that it delivers the highest income among all annuity options, although most individuals prefer some form of beneficiary protection.

In addition to the various payment options, annuities may include different features. One such feature is an annual payment increase option, which is based on a fixed percentage and allows for annual increases in the payment amount starting on the anniversary following your initial payment. It is important to note that the initial payment amount for an annuity with this option might be lower than that of an identical annuity without the option.

What is a fixed annuity with a guaranteed lifetime withdrawal benefit?

As part of a diversified income plan, a fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB) can provide guaranteed income for the rest of your life, starting on a date you select when you’re ready to start receiving income.

These annuities offer:

• Lifetime income – Ensure you do not outlive your assets by securing a lifetime withdrawal benefit amount, commencing on a date you choose.

• Flexibility – You have the option to decide when you would like to start receiving income, and if your circumstances change, you have the flexibility to access some or all of your contract’s accumulated value sooner.

From the time of purchase, you will know how much income you are guaranteed (for you and your spouse in joint contracts) at any age you decide to start lifetime withdrawals. Most importantly, you will have the assurance of a guaranteed cash flow, irrespective of market fluctuations and downturns. In the event of your death, your beneficiaries will receive any remaining balance in your policy.

What's right for you?

Selecting a payment option involves focusing on the specific features of a fixed lifetime income annuity and your personal objectives. Consider what is most important to you regarding your retirement plans. Do you require the most guaranteed income available, or are you open to accepting a slightly lower payment to provide additional protection for your beneficiaries?

How do lifetime income annuities fit into a retirement portfolio?

A lifetime income annuity can help diversify your retirement income portfolio, ensuring a portion of your income is shielded from market volatility. Generally, the Black Investors Coalition recommends that investors allocate no more than half of their assets to purchase income annuities. While these products provide guaranteed income for life, they may also necessitate giving up some liquidity and access to that part of your portfolio. Ultimately, your overall portfolio may benefit from a lifetime income annuity to help meet essential expenses throughout your retirement.

RMDs and Annuities

The SECURE Act 2.0, effective from January 2023, permits IRA income annuity holders to combine their income annuity with other IRAs for the purpose of calculating required minimum distributions (RMDs). For individuals aged 73 and above, the cash flow from the income annuity can be used to potentially offset RMD obligations from other accounts, enabling the assets in these accounts to remain invested and continue to grow tax-deferred. Annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB) function in a similar manner. It is important to note that this applies to newly acquired income annuities, those with a GLWB, as well as those established prior to January 1, 2023. We advise consulting with your tax advisor to understand the tax implications and to determine how this strategy aligns with your overall financial plan.

Best Regards,

Stock Market Charlie aka The Hound of 317