When people retire, one of the biggest challenges they face is switching gears from saving to spending. Although many people place money in good investments over the years, a successful retirement depends on how that money is channeled into steady income. A major concern many people have is whether they'll run out of money if they live longer than expected. Although pensions eliminated this worry in the past, many people are retiring without pensions today. This has brought the idea of including an annuity in a retirement portfolio.

Mutual fund companies, financial planners, academic communities and brokerage houses are showing their support for the idea. Insurance companies are developing new retirement-income products in order to meet the need for predictable income. Brokerage and mutual fund firms are also offering helpful tools to assist people in calculating how to implement an annuity into their income plans. In the past, such firms rarely implemented annuities in retiree asset-allocation recommendations. Annuities can be effective for this purpose if they're the right amount for the right person.

With the average lifespan increasing, this is a true possibility for anyone. Not everyone completely understands life expectancy. Men who are 65 are expected to live an average of about 84 years. However, a woman who is 65 is expected to live about 86 years. Although these averages are used by some people to determine how much to save for retirement, it's important to know that there is a 50% chance that life will exceed these estimates.

Some people choose to ignore the possibility of living longer. However, others protect their principal by limiting expenditures to four percent of savings annually. If a portfolio's values drop, this plan can fail. The reality of values dropping was seen in 2008. Longevity and market sustainability are unpredictable, so it's best to look for certainty elsewhere. There are several types of annuities to consider.

Longevity Insurance.

These types of annuities are fairly new. They have a much longer deferment, which means the holder of the annuity usually starts receiving payouts at about 85 years of age. This is a favorite among academics because this form of annuity ensures that the holder won't outlive their savings. The best part about this type of insurance is that there is a big payout in the future for a small investment. Some versions of these annuities also have death benefits in return for a smaller payout. Since many people are uncertain about their longevity, this type of annuity isn't selling in large numbers. Despite statistical possibilities of increased longevity, many people feel they won't live to be 85. However, longevity insurance maximizes retirement income when people need money to pay for long-term care, medical expenses and specialized treatments. Although many people don't buy this coverage, it's a very small price to pay for a beneficial insurance against the expenses incurred by living longer than expected.

Immediate Annuities.

These annuities guarantee stable income for the entire lifespan or for a specific amount of time, which is helpful for stretching retirement savings. Annuities pay a significantly larger percentage of the original investment than most retirement options do. To compensate for the high payouts, annuity holders give up principal access. Payments stop after death. Since there are downsides to these annuities, it's best not to invest everything in them. To determine how much to contribute toward one of these annuities, contact one of our agents.

Variable Annuities with Living Benefits.

Variable annuities combine tax-deferred savings and insurance. Individuals in these plans invest in a mutual funds portfolio. However, the money isn't tapped for several years, which allows the investments to grow. These investments are also a stable source of income when the market is unstable. Variable annuities are expensive and complex. However, there are new simplified products available that are very reliable. Finding a good variable annuity may be much more of a challenge than finding an immediate annuity. Be sure to compare fees, read prospectuses and know the guarantees.

Each of these options can be very beneficial additions to a retirement plan. Since each individual's situation is different, it's best to speak with our agents to determine the most optimal personal options.

* Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty. Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.
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