Retirement is never an easy equation to solve, but it can be a particularly challenging problem for women, who live an average of five years longer than men,1 make less money over the course of our careers,2 and then—wait for it—need to make that money last longer. Out-of-pocket healthcare expenses in retirement alone run an 39% higher for women than men, resulting in an additional $194,000 spent.3 Put it all together and it’s no surprise 60% fear they’ll run out of money if they live to 100, and 42% worry they’ll deplete their finances by age 80, according to the recent Women and Financial Wellness study, conducted by Merrill Lynch and Age Wave.4
So, what are some smart ways to stretch your savings, 20, 30, even 40 years into retirement? Living frugally, saving habitually and investing wisely are, by many accounts, the top three. But it’s the last on the list—investing wisely—that’s arguably the most difficult. It can involve a complicated calculus mixing judicious withdrawals from your portfolio while simultaneously trying to invest in a way that provides enough growth for the years still to come. When the markets are growing at a nice steady clip, it’s easier to maneuver. As long as you stick to a withdrawal rate of about 4 percent, you’ll likely be just fine. But entering retirement during down years (like the ones going into the Great Recession of 2008) can put a crimp in your retirement that’s tough to recover from.
"So, what are the best ways to stretch your savings, 20, 30, even 40 years into retirement? Living frugally, saving habitually and investing wisely are, by many accounts, the top three. But it’s the last on the list – investing wisely – that’s arguably the most difficult."
For women worried about not having enough to maintain their pre-retirement lifestyles, adding annuities to the mix in a way that, at least, accounts for your fixed costs, can be a strategy. They can provide guaranteed† income for a set number of years, or for the rest of your life, depending on what type you choose. Here are a few ways reasons to consider an annuity to help meet your retirement income needs—and ease your retirement mindset:
- You don’t want to manage your investments yourself.
By 2020, women in the United States will control $22 trillion in wealth,5 and many people don’t feel comfortable managing their own investments. If you don’t have the knowledge or the time to manage your investments, annuities can simplify the process. Within an annuity, insurance companies manage your investments and create a payout for you that’s guaranteed every month. Even if you are interested in and capable of making your own investments as you step into retirement, you don’t know what the future will hold. As you age and your decision-making abilities decline, you may not be able to reassess your portfolio every quarter, reinvesting your dividends and selling stock. Annuities send a payment your way each month, no matter what’s going on with the markets—or with your health. Just note: Fees and details of these products vary widely, so make sure you understand what you’re buying before you purchase.
- You want longevity protection.
Here’s something many people don’t understand about longevity: The older you are today, the longer you’re likely to live.6 That makes having firm knowledge that you won’t outlive your savings a tough hurdle to cross. Annuities, because they can be structured to offer monthly payments that last as long as you do‡, can help fill your income gap—and provide peace of mind.
- You want to be kept on a budget.
We’re all tempted to go over budget every now and then, but when you’re retired and on a fixed income, a little extra spending each year can spell disaster for the length of time you’re able to depend on your money. Annuities offer built-in protection against overspending, since they only pay out a certain amount each month. These structured products can’t be cashed out for a lump sum once you purchase them (without paying a penalty), so you know you’ll always have an income stream you can depend on. Note that many annuities do allow for some exceptions based on specific circumstances such as a terminal illness or other emergencies.
- You’re interested in fraud prevention.
If you’ve ever worried about someone walking away with all your assets one day, an annuity can be a good hedge against that, as your money won’t be sitting in your bank account as a lump sum. While technically there’s nothing to stop a fraudster from cleaning out your account each month, many criminals are after a single large payday, and an annuity that pays out over time makes that impossible.
- You have other financial needs you want to cover.
While annuities are most commonly discussed as retirement vehicles, they can be used for any purpose for which you’d like a guaranteed monthly income. For example, annuities can be used to help ensure monthly income for aging parents or a special needs child, or for college tuition for a grandchild. In other words, wherever there’s a fixed cost that needs to be consistently covered.
Talk to a financial advisor.
Annuities can be a big or a small part of your overall retirement strategy, and the best way to figure out where they fit in is by meeting with a financial advisor for a big-picture look at your finances. Although you should always understand how an advisor stands to benefit if you make a particular purchase (i.e. how that advisor gets paid), an advisor can also help determine which products are in your best interest, help you compare the price and safety of multiple products, and ensure you’re going with a reputable, highly-rated company.
Kathryn Tuggle contributed to this article.
*What is an annuity?
Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term investments designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 591/2. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.
† Guarantees are backed by the claims paying ability of the issuing insurance company.
‡ Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses, which are contained in the same document, provide this and other important information. Please contact your representative or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.