Income Annuities: A Smart Choice for Your Retirement?

Hi, it's Dre Griggs with Obsidian Wisdom. Today, we're discussing income annuities and whether they are a smart choice for retirement if you don't have a pension.

When it comes to the Wealth Retirement System, there are three key legs to the system:

1. Future-Proof Wealth Formula
2. Prosperity Healthcare Blueprint
3. Design Your Dream Life Framework

Today, we'll focus on one aspect of the Future-Proof Wealth Formula. The number one concern most people have is, "Dre, am I going to run out of money in retirement?"

If that’s something you’re worried about, we’re going to talk about possibly adding an income annuity into your retirement plan.

The Challenge: No Pension

For most people, pensions are a thing of the past. We’re living longer, but fewer of us have pensions. This means we have to allocate upwards of 20% of our salary over a long period of time, deal with investment returns, and try to figure out if we’ll have enough to retire comfortably.

Many people are trying to determine how much money they need to retire comfortably. While I generally lean on investments, particularly in the three asset classes that consistently generate wealth—stock market, business, and real estate—there are cases where an income annuity makes sense.

For instance, you may want the peace of mind that comes with knowing you'll receive a paycheck for the rest of your life, without worrying about returns or legacy.

What is an Income Annuity?

An income annuity differs from variable and indexed annuities. It's been around for thousands of years, dating back to the Roman Empire. The basic idea is that if you work for a period of time and allocate money towards retirement, you’ll receive a check for the rest of your life.

Pensions worked the same way. The risk was on the employer to ensure the pension fund didn’t run out of money. But when the government started requiring companies to tie up more money in pensions, many stopped offering them. Today, less than 20% of companies offer pensions, and most are in government jobs.

Types of Income Annuities

1. Deferred Annuity: You allocate a portion of your paycheck into the annuity over time and don’t use it for 5-10 years. Once you "annuitize" it, you receive monthly checks for life.
2. Single Lump Sum Annuity: If you receive a lump sum at retirement, you can invest it in an annuity and receive a monthly check for life. The amount depends on how much you invest.

Case Studies

For most people, the amount they need to invest in an annuity to cover all retirement needs may not add up. Usually, people will invest a percentage of their portfolio into an annuity.

For example:

• John, age 60, uses $100,000 from his 401(k) to purchase a single premium immediate annuity. He receives $6,000 annually. Add this to his Social Security, and he has a predictable income floor of about $30,000 a year.
• Sarah, age 55, has a deferred annuity. She plans to activate it at age 70, giving her peace of mind in her later years. She can spend more freely in her early retirement, knowing that the annuity will provide a floor of income later on.

Challenges with Income Annuities

While income annuities offer simplicity and security, they come with three major challenges:

1. Inflation Risk: Every 17-20 years, your purchasing power is cut in half. If your income doesn’t adjust for inflation, you may need twice as much money to live the same lifestyle.
2. Fees: Adding riders, such as cost-of-living adjustments or long-term care options, can increase the cost of your annuity, potentially reducing your returns.
3. Liquidity Issues: Once you invest in an annuity, the money is locked up. If you need a large sum for emergencies, you won’t have access to it.

When Is an Income Annuity a Good Fit?

An income annuity is a good option if:

• You prefer simplicity. You give the insurance company money, and they give you a check for life.
• You like the idea of a pension but don’t have one at work.
• You expect to live a long life. The longer you live, the more you benefit from the annuity.

Customizing Your Annuity

You can customize your annuity based on factors such as:

• Single vs. Joint Life: A single life annuity pays out more, but only for your lifetime. A joint life annuity pays out less but continues payments to your spouse after your death.
• Period Certain Annuities: Guarantee payments for a specific period, such as 10 or 20 years.
• Inflation Protection: Adding this rider adjusts your payout based on inflation.
• Qualified Longevity Annuity Contract (QLAC): This allows you to defer up to $200,000 of your retirement account funds until age 85, helping reduce your required minimum distributions.

Tax Implications

The tax treatment of your annuity depends on whether it's a qualified or non-qualified annuity:

• Qualified Annuities: Funded with pre-tax money, such as from a 401(k) or IRA. Payments are taxed as ordinary income.

• Non-Qualified Annuities: Funded with after-tax money. Only the earnings portion of each payment is taxed as income.

Examples of Using Income Annuities in Retirement

1. Single Retiree: Uses a single premium income annuity to cover living expenses. Other investments are for wants, such as travel.
2. Married Couple: Staggers annuity start dates to optimize income. One spouse starts at 62, the other waits until 70.
3. High Net-Worth Individual: Uses a QLAC to hedge against longevity risk, ensuring income later in life.

Final Thoughts

Income annuities can be a useful tool in your overall retirement strategy. They provide security but come with trade-offs, such as limited liquidity and the potential for lower growth compared to other investments. If you’re unsure whether an income annuity fits your plan, feel free to reach out for a complimentary consultation.

Until next time, stay safe and enjoy life!