When it’s time to turn your nest egg into retirement income, you may want some guarantees. For example, you might want a source of regular monthly income that can be counted on throughout your lifetime, without the worry of running out of money.
Options for creating lifetime income
One effective strategy for creating a lifetime income stream is to build an income floor that covers up your everyday necessities for life. With the basics taken care of, you can focus on enjoying your life in retirement.
Social Security can provide some of the foundation for your income floor. And if you have a defined benefit pension, include that income as well. For the rest, you may want to turn a portion of your annuity savings into lifetime income.
So how much is enough? You can use a budget worksheet to accurately estimate what essential expenses like food, shelter and healthcare will cost in retirement. If you want to cover 100% of essential expenses, calculate how much you will receive from Social Security and other sources, and, if there's a gap, consider annuitizing a portion of your savings. You can always convert more of your savings into lifetime income later if the need arises. In the meantime, withdrawals from your investment portfolio can be used to pay for discretionary or unexpected expenses as they arise.
Annuities are designed to give you the opportunity to grow your money while you’re working, and the security of an income once you retire. They may be available in your employer plan or IRA, as well as individually. Other than pensions, annuities are the only retirement products that can give you income for life.
Variable annuities: Your net contributions can be invested in a variety of asset classes that have growth potential. Then in retirement, variable annuities can provide lifetime and other income options. Variable annuity income varies based on the performance of the sub-accounts. This income is guaranteed to last for your lifetime, but the amount may go up and down. With variable annuities, your money will also be subject to the risks associated with investing in securities, including loss of principal.
Fixed annuities: These can earn a guaranteed minimum interest rate on your contributions. When you retire, they also can offer you stable income for life that is guaranteed to be consistent. Fixed income payments are based on the claims-paying ability of the issuer.
Shedding light on annuity myths
The Myth: You don’t need an annuity because you can get income by making regular withdrawals from an investment portfolio instead.
Creating a strategy for withdrawing from your portfolio
can help you weather the risks in retirement and lessen the risk of outliving your money. Social Security can help with that, but the only investment you can purchase that provides income you can’t outlive is an annuity.
The Myth: If you die owning an annuity, the insurance company keeps your money.
The Reality: You have the ability to add different options to help protect your loved ones (by specifying a set length of time to receive benefits) should you die. In exchange for this type of benefit, your initial income payment will be lower.
The Myth: Annuities are inflexible.
The Reality: Annuities offer a wide range of options such as when you receive your payments to whether they are fixed or based on market returns. And annuities don’t have to be an all-or-nothing strategy. They can be a portion of your income plan, working alongside Social Security and the rest of your retirement investment portfolio to create a baseline of income paired with withdrawals from other sources that can adjust with your needs over time. Knowing that some of your expenses are covered with income you can't outlive may then give you the flexibility to target leaving a legacy with your other assets.
The Myth: Once I receive income from an annuity, I can’t transfer the money to different investment accounts.
The Reality: While the portion you annuitize is no longer available for withdrawals, you may be able to transfer between TIAA Traditional annuity and CREF variable annuity accounts, with some restrictions, even after you start income. This allows you to modify your income strategy in response to market conditions or your personal needs.
The Myth: Annuities have high fees and hidden expenses.
The Reality: There are a number of low-cost annuity options. For a fixed annuity you should get an estimate of how much guaranteed income you could potentially receive and for a variable annuity you should understand any sales loads, surrender charges and other fees. You should always read the product literature including the prospectus of an annuity beforehand to get a sense of the features and the investment objectives, risks, charges and expenses.
If you make a withdrawal from an annuity prior to age 59½, you may be subject to a 10% penalty on earnings in addition to ordinary income tax.