Risk Pooling with an Annuity Can Ensure Income for Life.
If you’ve ever used the phrase, “all for one and one for all,” you may not have realized that this is becoming the new “mantra” for better ensuring income for life using annuities. Please allow us to explain…
As people plan to retire, it is necessary to find ways to convert savings into income sources. And, while the “traditional” income planning methods – such as portfolio drawdown strategies – may be able to generate cash flow for a certain period of time, there is a plethora of variables that could impact just how long the income, and even the portfolio itself, will last.
Take, for instance, early 2020 when the panic from the Coronavirus outbreak caused the Dow Jones Industrial Average to fall more than 35% from its all-time high in mid-February in a matter of just a few weeks.
Anyone planning to retire during that particular period of time has likely had to go back to the drawing board and come up with a new income-generating strategy (which could likely include delaying retirement and remaining in the workforce for a few more years…or even longer).
The Lifetime Income Solution
Unlike just a few decades ago, when many retirees could count on income from an employer-sponsored pension plan, most individuals now must come up with their own version of converting their savings into a viable stream of retirement income.
One of the best ways to do that is with an annuity. Using the concept of risk pooling, these financial vehicles can essentially “reward” those who live a long life by continuing to pay out income for as long as they need it.
As an example, let’s say that Alice is preparing to retire. She is currently age 65, and she has saved $1 million to put towards her future retirement income. Alice wants to make sure that she can rely on a regular “check,” whether she lives only one more year, or for another 30 years.
Alice’s financial advisor presents her with three possible options for accomplishing her income goal:
- The first option is to purchase bonds, which will provide her with income until they mature, at which time Alice will receive her principal back and can re-invest her money again at that time. Unfortunately, because no one knows what interest rates will be in the future, even this seemingly “safe” income strategy makes Alice a bit skeptical because she runs the risk of generating less income in the future – at a time when she will likely require more, particularly due to inflation and the potential for increased healthcare and/or long-term care expenses.
- The second alternative is for Alice to invest her $1 million in a diversified investment portfolio that consists of both stocks and bonds. This strategy could allow her to spend more money, given the growth potential of the stocks. But as most people are well aware, hope is not a strategy – so, if the stock market takes a fall, so will the value of Alice’s portfolio – and she even runs the risk of quickly depleting most or all of her assets. Then what?
- Alice’s third retirement income-generating option is to purchase an annuity that includes an optional benefit that will continue to generate a guaranteed income for the rest of her lifetime – no matter how long that may be.
Reducing Longevity Risk Through “Pooling”
Alice ultimately chooses option three – and there are several good reasons for her doing so. First is because she knows that with the annuity she can continue to spend for the rest of her retirement, regardless of what happens in the stock market or with interest rates.
Because the insurer that she purchases the annuity through “pools” Alice’s money with other annuity buyers, all of these individuals will receive income for the remainder of their lives. But, because some will not live to their life expectancy, those who live longer than anticipated can continue to collect their income payments.
It is this risk pooling that allows annuitants (i.e., annuity income recipients) to continue receiving income without the concern about below-average market returns. This, in turn, can provide them with both a higher standard of living, as well as a more worry-free life in retirement.
Is Risk Pooling with an Annuity a Good Retirement Income Strategy for You?
If you’d like to determine whether or not risk pooling through an annuity is a viable option for you, we can help. At Annuity Gator, our focus is on educating consumers about how to lock in a retirement income for life.
We also offer in-depth annuity reviews in our massive annuity review database on our website. So, if you have questions or would like to speak with one of our retirement income planning specialists, feel free to contact us directly at (888) 440-2468, or send us an email via our secure online contact form. We look forward to hearing from you.