If you're worried about outliving your retirement savings, you're not alone. Research shows it's a top concern for many Americans.
In a recent survey, financial advisors noted that health-care costs, market fluctuations and potential lifestyle expenses caused clients the most stress about running out of money. To alleviate those fears, many financial advisors suggest annuities as a way to ensure that clients have a stable stream of income during retirement.
As fewer and fewer companies now offer pension plans, the federal government is making it easier for retirement plans to include annuities as an option within 401(k)s and IRAs. Last October, the Treasury Department and the IRS approved guidance making it clear that employers can offer deferred-income annuities in target-date funds that are used as default investments in the retirement plans they sponsor.
The target-date fund can include annuities that begin payments at retirement or at a later time, offering a way to generate guaranteed retirement income and protect your income stream later in life.
When considering an annuity, it's important to read the fine print as many carry high fees. There's also the risk of not living long enough to receive deferred payments if you select an annuity that pays out later in life, or seeing inflation erode their real value.
Still, many experts argue that annuities at least provide some insurance against outliving your assets.
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And annuities may provide benefits beyond just making sure you don't run out of money.
A "deferred income annuity," which is the type of annuity the Treasury Department touted last fall in its guidelines, provides an income stream that generally continues throughout your life. But it doesn't begin paying out until several months or years after it's purchased, allowing the money to grow. The Treasury Department says this type of annuity "can provide a cost-effective solution for retirees willing to use part of their savings to protect against outliving the rest of their assets, and can also help them avoid overcompensating by unnecessarily limiting their spending in retirement."
Mitigating risk isn't the only reason to buy an annuity, said Ross Goldstein, a managing director at New York Life. "In addition to helping you not outlive your money, an annuity can give you more income in retirement so that you potentially retire earlier." New York Life recently conducted a survey of retirees age 62 to 70 with at least $100,000 in investable assets and more than half of them said they would have rather have retired about four years earlier than they did.
"Rather than run out of money, retirees are more likely to dial down their spending and live more conservatively. This is not necessarily the retirement that they had been planning," said Goldstein. "But if you have a guaranteed income stream, you don't have to worry about being as conservative," he added, potentially giving retirees more time to afford to be retired.