How Can an Annuity Help Provide Financial Security During Retirement?

Financial security can mean different things to different people.

In retirement, two objectives are especially important:

Principal protection and dependable lifetime income.

Annuities can contractually address both.

That does not mean every retiree needs an annuity or that every dollar should be placed into one.

It means annuities can be used as tools to provide specific guarantees within a broader retirement plan.

Key Takeaways

• Principal protection and lifetime income are two important components of retirement financial security.
• MYGAs can provide principal protection and a guaranteed interest rate.
• Lifetime income annuities can provide income you cannot outlive.
• Social Security is already an important source of lifetime income for retirees.
• An annuity can potentially fill a gap in your retirement income floor.
• Other conservative products can also play a role alongside annuities.

What Does Financial Security Mean in Retirement?

For retirement planning, financial security can begin with two questions:

How much of your money needs to be protected?

How much dependable income do you need every month?

Those questions address two risks:

• losing money you cannot afford to lose
• outliving the income needed to support your lifestyle

Fixed annuities can potentially help with both.

Principal Protection

Some retirement assets may need to remain protected from market losses.

A MYGA is one annuity designed for that purpose.

A Multi-Year Guarantee Annuity provides:

• principal protection
• a guaranteed interest rate
• a specific contract term

That can make the outcome easier to plan around.

MYGAs and Retirement Security

MYGAs can be useful for money that you want protected while still earning a contractual rate.

The rate is guaranteed for the selected term.

That is different from relying on hypothetical indexed returns or future market performance.

Lifetime Income

The second part of retirement financial security is income.

Annuities can contractually provide income for as long as you live.

That makes lifetime annuities useful for retirees who are concerned about outliving their savings.

Social Security Is Already Lifetime Income

Social Security provides an important foundation for many retirees.

It pays for life and provides cost-of-living adjustments according to the program rules.

If you have a pension, that adds another source of lifetime income.

Those guarantees become the starting point for your retirement income floor.

What Is an Income Floor?

Your income floor is the dependable amount of money reaching your bank account every month.

It can include:

• Social Security
• pension income
• annuity income
• other dependable sources

Compare that amount with the monthly income you actually need.

If there is a gap, an annuity can potentially fill part or all of it contractually.

Lifetime Income Is a Transfer of Risk

When you purchase a lifetime income annuity, you transfer longevity risk to the insurance company.

You no longer have to know exactly how long you will live to determine how many years the income needs to last.

The insurance company is contractually responsible for continuing the payments according to the policy.

Joint Lifetime Income

Lifetime income can also be structured for two people.

For example, a married couple may choose joint-life income.

The payment can continue for as long as either covered person is alive.

That can help protect the surviving spouse's income floor.

Financial Security Does Not Require Putting Everything Into an Annuity

An annuity is a tool.

It does not have to be the entire retirement plan.

If you only need a certain amount of additional guaranteed income, determine how much premium is necessary to create that amount.

The rest of your assets can remain available for:

• growth
• liquidity
• travel
• emergencies
• family
• legacy planning

Other Products Can Also Provide Security

Annuities are not the only conservative financial products available.

Depending on your goals, you may also consider:

• CDs
• Treasury securities
• high-quality municipal bonds
• money markets
• other conservative alternatives

Those can all play a role.

The major distinction is that annuities have the ability to contractually provide lifetime income.

Retirement Security Is Also About Spending

Many people spend their entire working lives learning how to save.

Then retirement arrives and spending becomes difficult.

Knowing that your principal is protected and your income floor is established can make it easier to understand what money is actually available to enjoy.

Financial security should support your retirement lifestyle, not simply create the largest account balance possible.

Legacy Can Be Part of the Plan

Annuities can also be incorporated into legacy planning.

For example, a MYGA may accumulate assets for beneficiaries.

Immediate Annuities can also potentially be established for beneficiaries as part of a broader estate plan, creating income rather than simply leaving a lump sum.

The structure should reflect what you want the money to accomplish.

Do Not Buy Guarantees Based on Hypothetical Growth

Financial security should not depend on a projection.

If you are using an annuity for retirement security, focus on what is contractually guaranteed.

That means distinguishing between:

• guaranteed interest
• guaranteed lifetime income
• hypothetical indexed returns
• projected values

The first two can be contractual. The others may not be.

Compare Multiple Carriers

Annuities are commodity products.

If lifetime income is the objective, compare the contractual payout from multiple appropriately rated carriers.

If principal protection is the goal, compare MYGA rates, terms, ratings, and liquidity.

The right contract is determined by the guarantee, not simply by brand recognition.

Where to Compare Retirement Annuities

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

You can evaluate MYGA rates for principal protection or compare lifetime income guarantees to determine how much dependable retirement cash flow a specific premium may provide.

The Bottom Line

An annuity can help provide financial security during retirement by solving two important problems: protecting principal and creating dependable lifetime income.

MYGAs can provide a guaranteed rate without market exposure, while lifetime income annuities can establish payments you cannot outlive.

Combined with Social Security, pensions, investments, and other conservative assets, those contractual guarantees can help create a dependable retirement income floor and provide greater clarity around the money available to spend.

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