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During the accumulation phase, investment volatility averages out over decades. During the distribution phase, bad returns in the early years of retirement can permanently impair your plan. If you retire into a down market and withdraw from a shrinking portfolio, you’re selling assets at depressed prices. Those shares can never generate future growth because you’ve already sold them.
A 2023 Allianz survey found that 57% of retirees said their greatest financial fear is outliving their money. Creating an income floor — guaranteed income that covers essential expenses regardless of what markets do — addresses this fear directly.
Fixed Indexed Annuities (FIAs) link credited interest to the performance of a stock market index without directly investing in it. If the index goes up 12% but your cap is 8%, you’re credited 8%. If the index falls 20%, you’re credited 0% — not negative.
They’ve become one of the most popular retirement savings products in the U.S. precisely because they address sequence-of-returns risk in a way that pure equity exposure doesn’t.
A retiree who needs $3,500 per month in predictable income, receives $2,200 from Social Security, and has a $400,000 portfolio might purchase an immediate annuity with $150,000 of that portfolio to generate the remaining $1,300 per month needed. The remaining $250,000 stays invested for growth and flexibility. The income floor is secured; the growth portfolio isn’t needed for essential expenses.
A Deferred Income Annuity (DIA) — sometimes called a longevity annuity — provides guaranteed income starting at a specified future date. A 65-year-old who purchases a DIA with income starting at age 80 addresses the “late retirement” risk. A relatively small premium at 65 can generate significant guaranteed income starting at 80, allowing more portfolio risk with other assets in the interim.
of retirees fear outliving their money (Allianz, 2023)
years of income needed for a couple retiring at 60 with life expectancy to 90
of pre-retirement income replaced by Social Security -- annuities fill the gap
Most states have guaranty associations that provide coverage for annuity contracts up to specified limits (typically $250,000) if an insurer becomes insolvent. Working with highly rated carriers and diversifying among companies for larger positions is standard practice.
Annuities typically have surrender periods during which early withdrawals incur charges. Most contracts allow penalty-free withdrawals of 10% per year, and many include provisions for withdrawals related to disability or long-term care needs.
The most common entry points are 5 to 10 years before retirement, at or near retirement, or when a specific risk — like outliving assets — becomes a primary concern. We generally recommend building a complete picture of projected income needs before recommending any specific structure.
Guaranteed income strategies aren't right for every dollar -- but they're right for some dollars in most retirement plans. Let's look at what role annuities might play in your retirement. No pressure, no obligation.