Strategies for Retirees Focused on Guaranteed Lifetime Income

Although there are many potential options for earning a steady income stream in retirement, very few of them are truly guaranteed. Many retirement savings tools take the form of traditional investments in tax-advantaged accounts. Those types of investments, whether they’re stocks, bonds or even real estate, come with inherent risks. Withdrawals from retirement savings during retirement can also cause those funds to dwindle, and they’re not guaranteed to last for life.

However, guaranteed lifetime income options are not unattainable. The inherent uncertainty of retirement is one of the reasons why financial and insurance products were created to meet this vital need for retirees. Many retirees can utilize a combination of Social Security, pensions (if applicable) and annuities to maintain an income floor that’s adequate to cover essential living expenses and basic needs regardless of market conditions.

Annuities

There are a variety of annuity types, some of which do provide a guaranteed income for life. Fixed annuities are the purest option in this regard and provide a stable income regardless of market fluctuations. Others, like variable annuities, may have income that varies based on the performance of underlying investments.

Annuities are complicated, with dozens of potential variations available for retirement savers. Not all provide guaranteed income for the remainder of the beneficiary’s life, which is why retirees who want annuities to act as a safety net should learn about all their options and make thoughtful, informed decisions.

For example, single premium immediate annuities (SPIA) can be purchased with a one-time lump sum and begin providing immediate payments that are guaranteed for the remainder of the holder’s life.

There are a number of ways that an SPIA can be tailored to the needs of the account holder, such as designated beneficiaries if a joint-and-survivor option is utilized, which can impact both immediate payment amounts and beneficiary payment amounts after the passing of the annuitant.

Deferred income annuities (DIAs) function similarly to SPIAs but only begin paying out at a future date, often 10 or 20 years after the contract is opened. These payments are also guaranteed for life starting on that future date and may allow for higher regular income payments depending on the initial purchasing amount.

There are also special annuity types that can be purchased within qualifying retirement accounts to address long-term income concerns. Qualified longevity annuity contracts (QLACs) are a type of DIA that can be purchased in an IRA or 401(k) to provide guaranteed income at an advanced age, like 80 or 85. These have the added benefit of allowing retirees to defer the required minimum distribution on the portion of their savings that was used to purchase the QLAC.

Variable and fixed annuities may also have a guaranteed lifetime withdrawal benefit (GLWB) feature, which allows the annuitant to withdraw a percentage of the account’s value annually for the remainder of their life, regardless of the underlying account’s value or performance.

Couples may want to look into SPIAs and DIAs that offer joint-and-survivor options to ensure a sustainable level of income for the lifetime of both spouses, regardless of which passes first. Survivor payments do vary depending on the type of annuities or how they are set up.

Life Insurance

Some universal life insurance policies have an optional income rider that allows the policyholder or beneficiary to convert the death benefit into a guaranteed income stream for the remainder of their life. This income stream functions like an annuity, with the total income varying depending on the size of the benefit, age and other factors.

Some life insurance policies also offer long-term care riders that allow the policyholder to access a portion of the benefit to cover long-term care costs. Although not exactly income for life, it may cover some significant expenses for the remainder of the beneficiary’s life.

Social Security

Social Security is a guaranteed income stream for retirees, although the way the benefit is claimed can have significantly long-term repercussions for beneficiaries and their spouses. For example, delaying the benefit until 70 can maximize the monthly payment for the remainder of a person’s life.

Total spousal benefits and survivor benefits can also vary significantly depending on when they’re claimed. Typically, if the higher-earning spouse delays taking their Social Security for as long as possible, it may leave the surviving spouse with higher survivor benefits.

There Are Few Guarantees in Retirement

Retirement is an inherently uncertain time in a person’s life. Serious health issues are more likely. A spouse who is mentally acute when they retire can begin experiencing memory issues as they age. Market volatility can greatly reduce the value of a 401(k) or IRA. Inflation can make what seemed like adequate savings during your working years suddenly feel inadequate to finance your retirement.

There are countless potential scenarios that may stress a retiree financially. Having a guaranteed income floor may provide peace of mind. If you want to learn about your guaranteed retirement income options, consider calling (623) 974-0300 to speak with the financial advisors at Fullerton Financial Planning.