Annuities Give Retirees Freedom to Spend

The days of riding off into the sunset with a guaranteed pension paycheck and a gold watch are no longer a reality for most people.

According to CNN, the percentage of private sector workers with a traditional pension plan is 4% today compared to 60% back in the early 1980s. And the few remaining companies with pensions are eliminating their plans as soon as possible.

It is understandable because, with a traditional pension, the company is solely responsible for funding a monthly pension check for an unknown number of years. Whereas, with a 401k plan, the financial responsibility is mostly on the employee, who invests over the years, must choose among what CNN calls the “sometimes confusing array” of offered funds, and who will at retirement be expected to figure out how to make it last a retirement lifetime.

So, rather than a pension paycheck, today most people retire with a lump sum of money for which they are responsible to ensure that it lasts the rest of their lives. This poses a big problem for many retirees who find themselves in this unenviable, critically important role.

Do you play it safe and try to only spend interest on the nest egg or use the money as it was intended and give yourself a dream retirement, but run the risk of running out of money?

The answer to this troubling question for some retirees may be to use some of that retirement savings to purchase an annuity that will guarantee income for life, which transfers the risk of living too long to an insurance company. It also offers you the confidence to spend the money you worked so hard to earn and enjoy your retirement.

Additionally, it may create a less stressful retirement by reducing the urge to focus time on following the movements of the sometimes rollercoaster stock market.

According to Michael Finke, a Professor at the American College of Financial Services, and David Blanchett, Head of Retirement Research at Prudential Financial Inc., guaranteed income gives retirees “a license to spend” because you no longer must look into the crystal ball to determine exactly how long you will live. It also gives you confidence that, even if you live to the ripe old age of Methuselah, you will not outlive your income.

Not only can annuities give retirees the freedom and confidence to spend their hard-earned money, but it may be with much less stress than the typical equity-only portfolio. It also alleviates the stress of adjusting spending on essentials when your living costs are covered by guaranteed income.

Further, annuities can transfer the risk of the sequence of returns to an insurance company. Sequence of returns risk is the risk that when the market is going down, drawing money out of an equity portfolio can increase the rate that the portfolio’s balance goes down.