Americans worry about running out of money, survey says, but annuities can help bridge gap

Financial professionals say that annuities have emerged as a compelling solution to bridge the retirement income gap. By converting a portion of their retirement savings into an annuity, retirees can secure a guaranteed income stream for life. This income can supplement other sources like Social Security and pensions, ensuring that essential expenses are covered without the risk of depleting their savings prematurely.

Extensive academic research underscores the benefits of annuities in retirement income planning. Studies have shown that annuities can significantly improve retirement outcomes by protecting against longevity risk and providing a consistent level of lifetime income.

• Longevity protection. One of the primary advantages of annuities is their ability to provide income for life, regardless of how long the retiree lives. This feature addresses the risk of outliving one's savings, a major concern for many retirees.
• Guaranteed income. Annuities offer a guaranteed stream of income, providing retirees with a predictable and stable source of funds to cover essential expenses. This can alleviate the stress and uncertainty associated with managing retirement portfolios and market fluctuations.
• Efficient use of assets. By converting a portion of their savings into an annuity, retirees can efficiently allocate their assets to generate a higher level of income than they could achieve through other investment vehicles. This can enhance their retirement lifestyle and provide greater financial security.
• Tax deferral. Annuities offer tax-deferred growth, allowing retirees to potentially accumulate more wealth over time compared to taxable investments. This can result in a larger income stream during retirement.

While annuities offer significant benefits, it is important to carefully consider how they fit into an overall retirement income strategy. Different investor profiles may benefit from annuities in different ways. For example:

• Ultra-conservative investors. For risk-averse individuals, annuities can provide a guaranteed income stream while still allowing for some market exposure through variable annuity options.
• Retirement de-riskers. Those looking to reduce equity exposure as they approach retirement may find annuities a more attractive alternative to shifting entirely into fixed-income investments.
• Long-lifers, inadequate savers. Individuals with limited retirement savings can use annuities to ensure a baseline level of income that will last their lifetime.
• Good savers, fearful spenders. Retirees hesitant to spend down their savings can use annuities to generate a reliable income stream, alleviating the fear of running out of money.

The survey findings, combined with academic research, highlight the potential benefits of incorporating annuities into retirement income planning strategies. By addressing the retirement income gap and providing a guaranteed source of lifetime income, annuities can play a crucial role in enhancing financial security and peace of mind for retirees.

While annuities offer some attractive benefits, it's important to also consider their potential drawbacks and limitations. Most annuities have surrender charges if you withdraw funds over a certain limit within the first several years after purchasing the annuity. Annuities often come with annual fees and expenses that can erode returns over time. These include mortality and expense fees, administrative fees and investment management fees for variable annuities. For fixed annuities that provide a set payment amount, inflation can diminish the purchasing power of those payments over time. While annuities can play a role in retirement planning, it's crucial to carefully weigh any potential drawbacks against the benefits for your specific situation.

The retirement survey highlights several key findings regarding retirement readiness and income planning in the United States.

Retirement readiness concerns

Working Americans aged 45 and older believe they need $1.1 million in savings to retire comfortably, yet 59% expect to have less than $500,000 saved. Only 24% of Americans aged 60-67 (nearing retirement) believe they have saved enough for retirement. Millennials expect to need $1.3 million for a comfortable retirement, but only 29% expect to reach $1 million in savings.

Retirement income challenges

While 72% of non-retirees are aware of higher Social Security benefits by delaying, only 10% plan to wait until age 70 for maximum benefits; 44% plan to claim Social Security early due to concerns about its solvency; and 36% say they'll need the money sooner. Non-retirees estimate needing $4,940 in monthly income for a comfortable retirement, including $5,135 for millennials; 49% of retirees don't use any retirement income strategies, simply taking money as needed.

Financial stress and advice

A total of 64% of working millennials and 53% of older workers fear financial stress will negatively impact their health. Millennials spend 1.9 hours per day (28 days per year) worrying about money. Millennials allocate 33% of retirement assets to cash due to market volatility fears. Millennials seek financial advice from family (38%), websites (23%) and advisors (22%).

The survey findings highlight the significant challenges Americans face in achieving retirement readiness and securing adequate income, underscoring the need for better planning, saving strategies and guidance.

The survey highlights several key challenges and concerns related to retirement readiness that indirectly point to potential mistakes. The challenges include:

• Underestimating retirement savings needs. Working Americans age 45 and older believe they need $1.1 million for a comfortable retirement, yet 59% expect to have less than $500,000 saved. This suggests underestimating how much savings is required for retirement.
• Lack of confidence in having enough saved. Only 24% of Americans 60-67 (nearing retirement) believe they have saved enough for retirement. This implies many may have miscalculated their retirement needs or failed to save adequately.
• Relying too heavily on Social Security. While 72% of non-retirees are aware of higher Social Security benefits by delaying, only 10% plan to wait until age 70 for maximum benefits. A total of 44% plan to claim Social Security early due to solvency concerns and needing the money sooner. This could be a mistake if Social Security alone is insufficient to cover expenses.
• Not seeking professional financial advice. Millennials primarily seek advice from family (38%), websites (23%) and advisors (22%). A lack of professional guidance could lead to improper planning and investment mistakes.

While the survey does not explicitly list the top retirement planning mistakes, the findings suggest common pitfalls like underestimating needs, inadequate savings, overreliance on Social Security and lack of professional advice could derail retirement plans.