A Publication of WTVP

Almost every working person in American is, in some way, planning for retirement. Most of us are aware traditional sources of retirement income, such as Social Security or an employer-sponsored pension, probably won’t fully fund our retirement as they did for past generations. More and more, it’s up to us to prepare financially for our retirement years. As we build our personal retirement assets, we generally estimate our needs based on the cost of our expected or desired retirement lifestyle, the current outlook for inflation, what we can currently afford to save, and our estimated life expectancy.

This seems reasonable, but what if one or more of these factors prove to be other than anticipated and the money doesn’t last? People are living longer today, and it’s especially necessary to plan for the possibility of a longer life span. What if you run out of retirement savings at age 85 and live 10 or 20 more years?

Annuitization May Help

Ensuring retirement savings last long enough is where annuitization comes in. Annuitization, available through insurance contracts called annuities, guarantees the annuity owner income payments for a pre-defined period of time, typically ranging from as short as five years to as long as the lifetime of the owner and his or her spouse. Additionally, many financial advisors consider this an excellent method of building future income because annuities are tax-advantaged investments—that is, their assets grow on a tax-deferred basis during what’s called the initial accumulation phase.

How does an investor fund annuitization? First, assets are invested and built up for a number of years in an annuity during the accumulation phase. As a hypothetical example, a man who’s currently 55 years old places assets into an annuity to begin the accumulation phase. When he turns 75, he’ll decide how long he wishes to receive payments and “annuitize” his annuity contract. Thus, he begins his income phase of the contract and starts receiving a check every month. If he elects a lifetime payout, he will receive checks for the rest of his life, regardless of how long he lives.

How assets build during the accumulation phase depends on which annuity you purchase. There are many types of annuities from which to choose. Some annuities guarantee a fixed rate of return (fixed annuities), while others offer professionally managed portfolios that usually invest in the stock market (variable annuities). Most variable annuities provide a range of features and benefits, including provisions for your heirs in the event of your death. (Variable annuities are sold by prospectus only. Read the prospectus carefully before investing.)

All offer the advantage of tax deferral on investment earnings, which, over the long term, can represent a significant increase in value over investments with earnings subject to annual taxes. As with other investments, diversifying assets can provide a desirable mix of liquidity, stability, lifetime income, and opportunity for growth. It’s best to talk with an investment professional to learn what choices might suit your individual circumstances. 

In the end, one of the greatest advantages of annuitization is you don’t have to know in advance how long you’ll require income. Therefore, you can rest a little easier knowing you’ll have at least one source of ongoing income throughout your retirement years. IBI