How Annuities Can Increase Retirement Income

The Annuity Man

With a demographic tidal wave of people reaching full retirement age every single day, the focus tends to shift from market growth to income.  Increasing your retirement income becomes the top personal finance goal for any long term financial plan.

Let’s take a look how annuity contractual guarantees can provide that need increase to that monthly income stream.

Thank The Romans

Annuities were first introduced in the Roman Times as a lifetime income stream for the dutiful Roman soldiers and their families.  The Latin word “annua” means payment and is the origin of the word “annuity.”

Today’s Single Premium Immediate Annuity (SPIA) structure is pretty much the same annuity from our Roman friends.  If you are dumb enough to say “I hate all annuities,” then you should also say that you hate all restaurants or all trucks.  It makes as much sense. There are many annuity types, but most contractually solve for income.  In fact, annuities are the only financial product that guarantees an income stream that you can’t outlive.

You Already Own An Annuity

Spoiler alert to all annuity haters, you already own the best inflation annuity on the planet. It’s called Social Security. Yes...your Social Security checks that come every month are an annuity payment.  It’s a lifetime income stream that you can’t outlive….just like an annuity income guarantee.

Social Security benefits are unfortunately the primary source of retirement income for many Americans.  The Social Security Administration was never designed to be the government entity of pension payments.  It was always intended to only be a supplement source of income.

Social Security is the best inflation annuity because the COLA (Cost of Living Adjustment) increase to the income stream is a political decision made by our friends in Washington, DC.  When annuity companies add a COLA to a policy, the income stream is significantly lowered when compared to the same annuity without a COLA attachment.  That income payment is primarily priced on your life expectancy at the time you start the payments, with interest rates playing a secondary role.

Annuities are transfer of risk contracts.  As I mentioned earlier, annuities are the only product that can guarantee an income stream that you can’t outlive.  There’s no ROI (Return on Investment) calculation until you die.  Up until that point, it’s a pure transfer or risk.  You either find value in that...or you don’t.

So when considering an increase to your retirement, guaranteed income annuities have to be at the top of your list.

Average Retirement Income Stats

According to the Center on Budget and Policy Priorities, in 2019 the average monthly income from Social Security was $1,470 per month...which is $17,640 per year.  The US Census Bureau estimates the average household median retirement income is $43,696 per year.  Bureau of labor statistics (in 2018) median weekly earnings was $991 for men and $796 for women.

A great article by Kathleen Coxwell lists all of the stats for retirement income and pensions as well.  For example, according to her article, the median annual private pension is $22,172.  It’s $22,172 if you have a federal government pension and $24,592 for railroad pension (the gold standard of pensions).

Those basic income statistics and retirement income statistics are a little sobering to say the least.  In other words, most people will need more income to live the lifestyle they desire and have worked hard to achieve.

So the reality for most people doesn’t always coincide with their stock market focused financial advisor.  Annuities have to be considered as part of the plan.  There is no rule of thumb for what annual incomes for retirement should be, so it comes down to what you are specifically trying to achieve and what are your income goals.

Building Your Income Floor

Before you implement a plan to increase your retirement income, you have to take a full inventory of your retirement savings nest egg, retirement accounts, and overall income sources.  Your Social Security payments, government pension, employer sponsored pension plan, RMDs (Required Minimum Distributions from your IRA), and annuities can all be a part of your income floor.

Income Floor retirement planning involves calculating the total amount of monthly income that you need hitting your bank account for the rest of your life.  This is income that will not be affected by politics or market volatility.  Whatever that dollar gap amount can be contractually filled by using annuities.  With this type of “gap fill” solution, you would reverse engineer the annuity quote to solve for the exact amount of needed monthly income.

For example, if you needed an additional $2,750 per month...you would quote all annuity companies to find the lowest premium amount to guarantee that monthly amount.

Gallon of Milk

Annuity quotes are like a gallon of milk, because they expire every 7 to 10 days and you can lock in a specific contractually guaranteed number through the application process. It’s important to remember that annuities (regardless of type), are commodity products and all carriers should be quoted in order to find the highest contractual guarantee for your specific situation.  You need to find an objective annuity calculator that quotes all product types and all carriers to find the best deal available.

People always ask me “What’s my favorite annuity or annuity company?” My answer is, “the company that has the highest contractual guarantee for your situation.”

When planning to increase your retirement income, that should be your answer as well.

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