Creating a guaranteed retirement income: Bridging the gap with annuities
Ensuring that your financial resources align with your lifestyle is necessary as you approach retirement. While Social Security offers a foundation, it often falls short of covering your day-to-day expenses. The average American aged 65-74 requires over $60,8001 annually for essential spending needs, while Social Security benefits typically amount to around $22,800.2 This results in a significant annual spending gap of over $38,000. This article exposes the challenge of relying solely on Social Security and presents an effective solution to create a guaranteed retirement income – annuities.
The social security issue
Statistics from the Social Security Administration reveal that the incoming money replaces only 40% of most people's pre-retirement income. This means many retirees could face a hefty spending gap during their retirement years. However, it's essential to note that these figures are based on averages, and every situation is unique. With this in mind, how can you secure a consistent income to cover your needs throughout retirement?
The role of savings
The short answer is savings. Your retirement accounts, such as your 401(k) and IRA, are key to creating a stable retirement income. When addressing that spending gap, you typically have two options:
Larger withdrawals: Opting for larger withdrawals from your retirement accounts might seem like a solution. However, this approach comes with potential drawbacks:
Increased investment risk
Higher tax liability
There is a greater risk of running out of money due to larger withdrawals and heightened investment risk.
Smaller withdrawals: Alternatively, you could choose smaller withdrawals, but this may result in:
Failing to maintain your desired standard of living
The risk of outliving your savings due to longevity or market downturns.
Enter annuities: Your pension alternative
An annuity is an attractive solution to address these challenges because it can create guaranteed retirement income. An annuity is a contractual agreement between you and an insurance company designed to help you achieve various financial goals. It's a tool that offers stability and predictability, even in the face of market volatility.
Guaranteed income rider
Some annuities have an optional feature known as a guaranteed income rider. This rider can involve an additional fee but provides a powerful advantage – the ability to cover any essential spending gap. By selecting this rider, you secure a steady, regular income guaranteed for life. This effectively ensures that your retirement savings will continue to support you throughout your retirement journey.
In pursuing a financially secure retirement, you may need more than Social Security to cover your essential spending needs. However, by strategically leveraging your retirement savings and exploring the benefits of annuities, you can bridge the income gap and create a guaranteed retirement income stream to last a lifetime. With careful planning and the right tools, you can confidently step into your retirement years, knowing your income needs are met.
Sources
1U.S. Bureau of Labor Statistics, Consumer Expenditure Surveys - Age of reference person: Annual expenditure means, shares, standard errors, and relative standard errors, September, 2023
2SSA.Gov, What is the average monthly benefit for a retired worker?, January 2024.
