“Guaranteed” Retirement Income

Key Takeaways:

• Guaranteed retirement income may sound appealing to many retirees, but these types of investments are not necessarily appropriate for everyone
• No matter what product you are considering investing in for income needs, you should consider how well it fits in with your personal retirement needs and goals
• If a certain lifetime income product sounds too good to be true it might be—follow these considerations to make sure you are receiving a legitimate investment suited to your situation

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.

Types of Guaranteed Income

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:

• Bonds: When you purchase a bond, you are lending money. In return, you receive a coupon payment plus the principal when the bond matures. Some investors consider bonds to be sources of guaranteed income. However, consider that corporate bonds depend on the company’s ability to pay—there is a risk of default.
• Social Security: If you’ve earned the appropriate number of credits to be eligible for Social Security, you can begin receiving income once you reach retirement age. Note that there are a number of factors that can affect the benefit you receive—including when you choose to retire, if you decide to continue working while receiving benefits and in some cases the type of income you earned while working. Visit the Social Security website to find out more.^[i]
• Pensions: Some retirees may have access to a pension, which provide a guaranteed benefit from an employer. These are also known as defined-benefit plans—meaning they guarantee a certain amount of retirement income that is not dependent on investments.

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.

Considering Guaranteed Retirement Income Products?

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:

• Fixed annuities: These typically guarantee a fixed or minimum rate of return over a fixed period of time. You hand over a premium either as a lump sum or periodically, for a guaranteed income stream. If you die before collecting your payments, family members who outlive you may not see any of it unless you have purchased a death benefit rider, which often comes with an additional fee.
• Variable annuities: Usually pitched as a way to grow your money with a guarantee, variable annuities allow you to invest your premium in sub-accounts similar to mutual funds. But that often means additional fees that could detract significantly from your total return.
• Indexed annuities: These types of annuities offer a rate of return based on a specific market benchmark like the S&P 500 index, but the returns may be capped. So they may underperform the benchmark in the longer term. Also keep in mind that some indexed annuities don’t include dividends, which can be an important part of total return.

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?

Is Guaranteed Income the Right Choice for You?

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:

• The adviser has full custody over your assets. Letting the adviser who has the power to make your investment decisions also hold your money isn’t a surefire sign of fraud, but it makes fraud much easier.
• Returns are always claimed to be great. If it sounds too good to be true, it probably is.
• The investing strategy is too complicated or difficult to understand.
• Adviser touts itself as “exclusive” or distracts with flashy incentives.
• You didn’t do the due diligence when you researched the adviser. Instead, you trusted an intermediary.

Fisher Investments—Here to Help

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.

^[i] https://www.ssa.gov/planners/retire/