Fixed for Life

More than 40% of Americans ages 36 and older are at risk of running out of money in retirement, according to a retirement readiness study.

Researchers divided working Americans into four groups, ranging from the lowest to the highest income levels. They found that, even though the risk of running out of money decreases with a higher pre-retirement income, almost one-third of people with upper-middle incomes and 13% with high incomes may not be able to pay for basic retirement expenses and uninsured health-care costs after two decades in retirement.¹

The risk of running out of money doesn’t appear to be reduced for people who have more time to prepare for retirement: Baby boomers and Generation Xers are almost equally at risk.²

Fortunately, it’s possible to purchase an insurance product that could pay an income for a specified period, including your lifetime or the lifetimes of you and another person. The guaranteed retirement income available from a fixed annuity could be just the fix you’re looking for.

Fund Your Future Income

A fixed annuity is a contract with an insurance company that guarantees a fixed rate of return during the life of the contract. The type of annuity that may be appropriate for you will depend on your situation.

An immediate annuity is typically funded with a lump-sum premium. Payments start soon thereafter and continue for the duration of the contract. This type of annuity is often purchased at the beginning of retirement.

A deferred annuity can be funded with either a lump-sum premium or a series of payments over time. Payments start at some point in the future at a rate that reflects any tax-deferred growth during the accumulation period. The income amount depends on the amount of the initial contract, the contract’s rate of return, the age of the contract holder, and the number of years over which payments will be received.

Annuity Trade-Offs

Generally, annuities have contract limitations, fees, and expenses. They tend to offer more conservative rates of return than the financial markets because the insurance company is responsible for paying the contract’s stated return, regardless of market conditions. Of course, any guarantees are contingent on the claims-paying ability of the issuing insurance company.

Most annuities have surrender charges that are assessed during the early years of the contract if the annuity is surrendered. Distributions of annuity earnings are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

If you are concerned about running out of money in retirement, it might be time to consider a fixed annuity. A stable source of income could be a welcome addition to your portfolio.

1–2) Employee Benefit Research Institute, 2010

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