A unique characteristic of the annuity concept is that you have guaranteed lifetime income. Insurers provide you with the assurance that they will disburse payments to you until the day that you die. The magnitude of your guaranteed lifetime income depends on your age, gender and contribution(s) – to name a few factors. The concept of guaranteed lifetime income is backed by the annuity contract and the ability of the insurer to meet liabilities as well.
On the surface, that appears to guard against outliving retirement savings. In the strictest sense, if you have guaranteed income you could never outlive your savings. However, it is not guaranteed lifetime income that prevents irreparable depletion of your retirement savings.
You could be living in abject poverty on ‘guaranteed income’. Do you think that you could receive a dollar per month (guaranteed) for the rest of your life and claim that you will not outlive your retirement savings? The extremity of the example just emphasises the folly of that notion. While the concept of guaranteed life income is an important concept, it doesn’t automatically suggest that you would not outlive your savings.
A guaranteed income stream is just one pillar of retirement planning. That income stream must be sufficient over time and you should also have savings and investments in different asset classes. What the annuity does is simply convert your contributions to it into lifetime payments at maturity- no matter how long you live!
Before you pat yourself on the back for discovering the wonder of guaranteed lifetime income, consider that fixed payments decline in value over time. Further to that, even variable or indexed annuity payments (those that fluctuate or increase over time) may not be sufficient to prevent you from wiping out your life savings.
The ultimate financial truth that you must face is that savings and income are different- though related- dimensions. That’s basic accounting. It’s a stark reality that just purchasing an annuity and having a guaranteed lifetime income is not enough. Persons should plan for at least 30 years of retirement to be prudent. Inflation risk and purchasing power risk decrease the value of annuity receipts (whether fixed or variable annuity income).
To ensure that you do not outlive your life savings, you must balance your income and savings. It is important to have both a sizeable retirement fund and an ample retirement income to afford the retirement lifestyle that you want or afford a rising cost of living. Guaranteed lifetime income is part of the plan, but only one spoke in your retirement wheel.
The question to ask is ‘How much is enough?’ with regard to both guaranteed lifetime income offered by annuities. In addressing these concerns your only source of retirement income does not have to be guaranteed. You can use income options in a diversified plan as well. Compared to using an annuity, choosing options in the ‘income’ group allows you to own your funds and reap returns. The annuity would allow you to reap returns only. For instance, the immediate annuity can even render many retirees highly illiquid. In plain language- that’s broke!
You need to know what your guaranteed income should be. This prevents your having to withdraw significant amounts from your retirement savings just to survive. A basic way to do this would be to assess your current living expenses- excluding expenses. Then you should project what those expenses would be at retirement (using a projected inflation rate). From there, you’d need to factor a retirement period of 30 years and further inflation during retirement. Ensuring that your income is adequate is a minor way of guarding your life savings from rapid depletion.
‘Outliving your savings’ indicates that you have limited or no financial reserves. You may be living payment to payment- having nothing to draw on for emergencies. Guaranteed lifetime income doesn’t prevent you from suffering that fate on its own. Only proper retirement planning ensures that you begin on solid ground and remain there throughout your retirement.