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Annuities; What Are They Good For?

Chad Roller

Very few things in life are guaranteed, and atop the list are death and taxes.  

Like me, you may have heard this statement many times over your lifetime. As I have aged, life experiences have proven to steadily uncover the statement’s sometimes harsh reality.  You may feel like, when it comes to your life savings and investments, the only guarantee is that you will be short of your retirement goals. 

No matter what your current financial status is, starting to develop a plan now is vital. We call this planning The GenWealth Ready to Retire Process. The focus of this planning process is to create a predictable, dependable income stream designed to last throughout your lifetime. When describing this retirement income, we break it down into two parts: required and desired. 

Your House of Financial Independence

To help paint this picture of required and desired income in retirement, think about how a house is built. The most important element of a home is a solid foundation. Without it, whatever else you desire to build on top of it won’t have the stability it needs. I am experiencing this firsthand as my wife and I are currently building our family’s new home.  Since we broke ground a few months ago, construction progress seems slow with a long way to go to completion. However time-consuming this part of the building process may be, we understand the importance of a solid foundation.

The same goes for your required retirement income.  In retirement, there will still be a set amount of monthly living expenses which must be paid in order to merely exist in life.  These expenses will be regular and dependable throughout your retirement. To meet these expenses, you obviously need a steady income foundation. What lifetime income sources are you expecting to receive when you retire?  These income sources are often Social Security, pension payments, etc. and you may be able to cover your monthly expenses from those. However, if there are required expenses exceeding income sources, we would determine that you have an income gap. 

Mind the Gap

If a gap exists between how much you’ll need and how much you’ll have, the next step in our planning process would be to fill this income gap with a guaranteed product. Just as you would desire no gaps in your home’s foundation, gaps in your monthly income simply won’t work. To fill the gap, we could use a portion of your retirement savings to fund an annuity with lifetime income benefits. 

You may be asking yourself what is an annuity, and what are the guarantees. For a simple definition, investors give their money to an insurance company that provides a contract with guarantees for how they pay the investors back their money, which in most cases is through a lifetime income benefit. 

Annuity contracts are available in various types and can be handled in many ways, just like the multiple tools that will be used by my contractor to build my family’s home. The role of your financial advisor is to select the tool which addresses your required income need most efficiently. Once we have established this additional guaranteed lifetime income source to complete your retirement foundation, you can begin to plan for your desired monthly income. How we at GenWealth plan for and establish your desired income, which is the next phase of building your “house” of financial independence, is a topic for another day.

Your Financial Tool Belt

The key is that your retirement income plan must start with establishing a solid income foundation.  If your foundation has a gap, an annuity is the one financial tool available to provide additional guaranteed lifetime income. The type of annuity you may need is dependent upon your unique circumstances. Just as the tools for building my new home must be used for the right purpose, when planning for retirement, an annuity can be just the right tool to complete your solid foundation. 

Download our free Retirement Balance Sheet to help you determine if you have a gap in your retirement income!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claim’s paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

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