Is An Annuity For You?
People’s overconfidence in their investing ability makes them less likely to choose guaranteed income. New research by retirement expert Mark Warshawsky suggests more retirees should consider making an immediate annuity part of their retirement portfolio. He also highlights a reason why many people may simply ignore this advice.
When it comes to turning retirement savings into lifetime retirement income, many retirees and advisers rely on the 4% rule. That is, withdraw 4% of savings the first year of retirement and increase it by inflation each year to maintain purchasing power.
But will a systematic withdrawal strategy provide more income over retirement than simply purchasing an immediate annuity? Warshawsky examined how hypothetical retirees of different ages retiring during different years would do with an immediate annuity vs. using the 4% rule. Warshawsky concluded that while annuities didn’t always outperform systematic withdrawal, it provided more inflation-adjusted income throughout retirement.
Does this mean all retirees should own an immediate annuity? Of course not. There are plenty of reasons that might not be the right choice. If Social Security and pensions already provide enough guaranteed income, an annuity may not be necessary. And, if you have severe health problems or believe for some other reason you’ll have a short lifespan, then an annuity probably isn’t for you.
In the end, we all have to make our own decisions based on our own financial circumstances. There’s no one-size-fits-all solution. Annuities aren’t for everyone, but they can play an important role in guaranteeing financial stability during retirement.