The prospect of guaranteed income in retirement may appeal to investors. Guaranteed income is money you can count on receiving regardless of what financial markets do. Many guaranteed income products provide regularly occurring payments. Investors may consider using these products if they believe the products will be able to provide for expenses in retirement, or because they fear losing money in investments.
However, not all guaranteed income sources make sense for everyone. Depending on the product, drawbacks could include high costs, inflexibility, inappropriate growth potential, or simply improper alignment with your personal retirement goals. You should review what the guaranteed income products actually guarantee and know that “guaranteed” doesn’t necessarily mean there is no form of risk at all. Finally, be wary of anything that seems too good to be true.
There are a number of different sources that can provide guaranteed income, with some significant differences. In this article we will primarily focus on one of the most common guaranteed income products: annuities. Annuities are a type of contractual agreement with an insurance company. When you purchase an annuity contract, you pay a lump sum up front in exchange for a guaranteed lifetime income stream. You can begin receiving that income immediately (immediate annuities) or at some point in the future (deferred annuities).
Some other common sources of guaranteed income in retirement include the following:
While these sources can be an important part of your retirement income planning, it’s important to evaluate your expected benefits and whether those benefits will be enough to support you through the entire length of your retirement.
What are your long-term retirement goals and needs? You may want to maintain your pre-retirement lifestyle or even improve it. Perhaps you want to leave some of your wealth for your children, your grandchildren or charity. To understand whether or not guaranteed retirement income fits in with those goals, consider these questions.
Will I need growth in my portfolio in order to have enough income during retirement? If inflation rises, the purchasing power of a fixed benefit falls. Annuity income is typically not adjusted for inflation—or if it is, there is an additional fee for inflation protection. If you need growth to counteract the effects of inflation, or to meet your long-term retirement needs or goals, a guaranteed income product might not be appropriate.
How do the costs of guaranteed income impact your portfolio? Some annuities don’t charge a flat fee. Instead they could have layers of fees that could add up to significant amounts. For example, some annuities may charge for mortality and expense risks, administrative fees, death benefit riders, lifetime withdrawal benefit riders or underlying funds within the annuity. Over the course of a few years, these fees could add up to affect your total portfolio returns.
What type of guaranteed income product are you considering? If you are considering annuities as a source of income, be aware of the different types that exist. Here are some common types and considerations:
Can a guaranteed income product change with your needs? There may be occasions when you need more income than you initially expected. Or you may need to withdraw a larger lump sum for a one-time expense. If this happens and you have an annuity, you may end up losing money. For example, most variable annuities have a “surrender period.” If you leave before that period is over, you may be hit with significant fees.
Have you properly vetted the product and do you understand the specifics? You should do your due diligence on any investment, especially those that say income is guaranteed. Some products can be complicated. Even if you read a sales guide or prospectus, you still may not understand the investment strategy. The details of an investment product or contract are important and could affect how well the investment is suited to your needs. Understanding how the seller benefits from selling the guaranteed income product is also important. Are their interests aligned with yours?
Finally, before purchasing a guaranteed income product, ask the right questions and research the product and seller. There is a chance that “guaranteed” income may turn out to be a scam. Here are some signs that could indicate financial fraud:
Generating income to meet your needs in retirement is important. You may need to make a number of investing decisions during your planning process. If you need help planning for your retirement income needs, contact Fisher Investments today. We may be able to help.