The United States is experiencing a demographic tidal wave of people hitting retirement age.  Over 10,000 baby boomers reach this “2nd Chapter of Life” milestone every single day.  Just a basic financial plan or generic retirement planning is not enough anymore for a growing number of people.  Retirement income planning is the new focus for most Americans looking to move away from stock market returns/investment returns and more toward contractual guarantees.

If income is the goal, then you need to seriously consider annuity transfer of risk contracts that contractually guarantee a lifetime of payments.  Whether you are already enjoying your golden years or planning on that specific year of retirement, you need to understand how annuities work so you can make an informed decision.

Lifetime income Floor Planning

Retirement income planning and overall retirement planning actually means “Income Flooring.”  Your income floor is the guaranteed income stream that hits your bank account every month like clockwork, regardless of what happens in the world.  Part of your income floor might include your Social Security payments, a pension (if you are so fortunate), your RMDs (Required Minimum Distributions) from your Traditional IRA, dividends, and other forms of income.  Hopeful returns on your investment portfolio or non-guaranteed potential returns are not part of your income floor.

You need to add all of those income streams together to determine your overall retirement spending, and to see if there is an income gap that needs to be filled.  If there is that specific dollar gap amount, that’s where annuities could possibly be a good fit to contractually meet your retirement goals.

Only One Choice

Annuities as a category have a monopoly on lifetime income.  So if you are serious about Retirement Income Planning, annuities will definitely have a place in that income plan. Annuities are contractually guaranteed transfer of risk contracts that are issued by a specific life insurance company.  The majority of lifetime income annuities are classified as a fixed annuity, and are regulated and backed at the state level.

The origin of annuities can be traced back to the Roman Times, when “annuas” (Latin for payments) were set up for life to reward to the dutiful Roman soldiers and their families. That first Roman type annuity is today’s Single Premium Immediate Annuity (SPIA).

SPIAs and other types of retirement income annuities can also have a COLA (Cost of Living Adjustment) increases to the contractual payment that can be added at the time of application.  Understand that you already own the best inflation annuity on the planet...Social Security. Annuity companies don’t “give away” those COLA increases.  The significantly lower the initial income payment amount when a COLA is added when compared to the same annuity without a COLA.  They have the big buildings for a reason!

Proportion Matters

The Annuity Industry has taken some PR hits in the last few years, and knows that they have a crucial role in making sure the consumer is protected.  With that being said, I applaud the annuity industry for having a “free look” time period for each issued policy so the consumer can get a full refund.  No questions asked.  No other financial product offers that type of “test drive” provision.  In addition, annuity companies do not want you to put too much money into annuities.  I know that flies in the face of an industry dependent on sales, but strict rules are in place to make sure that any proposed annuity purchase is in proportion and allocated properly.  The industry is very serious about this rule.

Currently, you are not allowed to place more than 50% (and up to 60% is special cases) in an annuity...regardless of type.  The only way around this rule is if the agent or advisor mistakenly or purposefully fills in the application wrong.  The annuity carrier will look at that application to make sure that there is sufficient liquidity, and the percentage goals are met.  The bottom line is they don’t want some senior citizen (or anyone for that matter) to be duped into putting all of their money into an annuity.

Life Expectancy Play

Annuity lifetime income is primarily priced on your life expectancy at the time you start the payments. Interest rates play a secondary pricing role. Annuity income (regardless of type) is a combination of return of principal plus interest (i.e. withdrawal rate).  The transfer of risk benefit proposition of an income annuity is when you draw your account down to zero.  At that point, you are in the annuity company’s pockets and they are on the hook to pay regardless of how long you live.

Up until that point, you are getting your own money back with interest.  That’s how income annuities work.  They contractually solve for longevity risk, which is the fear of outliving your money. In fact,  Deferred Income Annuities (DIAs) are sometimes referred to as “Longevity Annuities.”  The reality is all lifetime income annuity types could be categorized as longevity annuities.

Grab Your Calculator

Annuities are commodity type products.  That means you need to quote all carriers in order to find the highest contractual guarantee for your specific situation.  You need to use a retirement income planning calculator, retirement calculator, or annuity calculator that shops all carriers.  Be aware that most annuity quotes expire every 7 to 10 days, just like a gallon of milk.  You can lock in a quote by moving toward the application process.

When people ask me, “What is the best annuity for retirement income planning?”, my answer is the carrier that offers the highest contractual guaranteed number for your specific situation.  I go into every quote or every annuity calculator process with no specific company in mind.  I only care about the highest number, and that’s all you should care about as well.

Retirement income planning really translates into “retirement lifestyle.”  It’s important to gauge your risk tolerance and be specific with your long term income goals.  How much risk do you want to shoulder with your overall non-annuity asset management, and how much risk do you want to transfer?

Transitioning your savings and investments to guaranteed retirement income can sometimes be difficult.  Investment FOMO (Fear of Missing Out) is real, and can be paralyzing from a decision making standpoint. Fear and greed...right?  It might be time to start focusing on guaranteed income. It’s at least worth looking under that annuity rock.