CBIZ
  • Article
June 25, 2024

Using Annuities to Fund Your Retirement

Table of Contents

As retirement approaches, the focus shifts from accumulating savings to ensuring a steady income stream that supports your lifestyle. Annuities have become an increasingly popular choice for many retirees seeking financial peace of mind amid market volatility. Here’s how you can effectively use annuities to fund your retirement.

Estimate Your Costs Start by envisioning your retirement lifestyle. Consider your plans for living arrangements, daily activities, travel and family priorities. This vision will guide your financial planning and help you determine your needed resources. Next, estimate the cost of this lifestyle. Many aim to replace 70% to 100% of their working income. Begin with a budget that separates essential expenses, such as housing, healthcare and food, from discretionary ones like travel and hobbies. This helps you understand your cash flow needs and plan accordingly.

Diversify Your Income Sources Your retirement income will likely come from multiple sources, such as Social Security, pensions, savings and investments. To ensure a steady monthly income, consider creating a detailed income plan that includes annuities, which can provide a reliable income stream.

Types of Annuities & Their Benefits There are different types of annuities, each with its benefits:

  • Fixed-Rate Annuities: Provide a guaranteed interest rate on your money for a set period — ideal for older investors seeking safe returns. Be aware of withdrawal restrictions and surrender charges.
  • Multi-year Guaranteed Annuities (MYGAs): Similar to CDs, offering a fixed interest rate for a term of three to seven years, often paying higher rates than CDs. Watch out for surrender charges and tax penalties on early withdrawals.
  • Fixed Indexed Annuities: Link returns to an index like the S&P 500, offering growth potential with a guaranteed minimum interest rate. They protect your principal, but terms can be complex, including participation and cap rates.
  • Registered Index-linked Annuities (RILAs): Provide a buffer against market losses while tracking an index, offering potential gains with some risk of loss. Understand the surrender charges and potential risks before investing.
  • Single-premium Immediate Annuities (SPIAs): Convert a lump sum into a guaranteed income stream, providing reliable payouts to help cover basic expenses not met by Social Security or pensions. Consider features that ensure heirs receive something if you die early.
  • Deferred Income Annuities: Operate like SPIAs but start payments much later, such as at age 80 or 85, offering longevity insurance at a lower cost.

Manage Required Minimum Distributions (RMDs) Required minimum distributions (RMDs) start at age 73, rising to 75 in 2033. Ensure you comply to avoid penalties, which were reduced from 50% to 25% by the SECURE 2.0 Act. Maximize tax advantages by drawing first from taxable accounts, allowing retirement accounts to grow tax deferred. This strategy helps manage your tax liability and preserves your retirement savings.

Seek Professional Advice Navigating annuities can be complex, so be sure to seek advice from financial advisors who prioritize your interests and understand the evolving annuity market.

Annuities can offer retirees financial stability and peace of mind by providing a guaranteed income stream and protection against market volatility. By understanding the types of annuities and strategically incorporating them into your retirement plan, you can secure a steady, reliable income that supports your desired lifestyle.

Connect with one of our professionals to learn more about how to recreate your paycheck in retirement.

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