April 1st, 2024 | Scott Miller, Product Manager, CapitalROCK
Let’s start with a discussion about what income is available in retirement and what are the different funding sources, followed by a case study and an in-depth discussion of how Annuities can provide essential income during retirement.
In 1975 there were 311,094 total Pension Plans that filed returns. Of those 103,346 were Defined Benefit Plans representing 33.22% of total pension plans. In 2021 the most recent year that data exists there were 765,124 pension plans, of which 46,388 or 6.06% were Defined Benefit plans.
One of the many advantages of a Defined Benefit Plan is the payout options available. Typically, a plan will guarantee payments for life, life with a period certain, life with a cash refund, or joint with multiple percentage options for the survivor.
Some current retirees worked for an employer that offered a defined benefit pension plan. With the promise that if you work for 30 years and make $60,000 when you retire you will receive 60% of your ending salary, or some other similar scenario. In large most of these types of pensions have gone away unless you work for a governmental entity, Federal, State, City, School, or other public institution.
Advantages of a Defined Benefit Plan?
What if you don’t have a Defined Benefit Pension plan to rely on for income in your retirement years. Where can you get the money necessary to fund your 30 + years of retirement and how much do you need?
The average retirement income for U.S. adults 65 and older is $75,020. The median income for that age group is $50,290, according to data from the Census Bureau and Bureau of Labor Statistics. On a monthly basis, the average income for U.S. adults 65 and older is $6,252. The median monthly income is $4,191.
For most retirees, Social Security and (to a lesser degree) pensions are the two primary sources of regular income in retirement. You usually can collect these payments early—at age 62 for Social Security and sometimes as early as age 55 for a pension. (Schwab.com)
Age | Number | Percentage | Average Benefit |
62 | 807,587 | 27.30% | $1,288 |
63 | 222,908 | 7.50% | $1,510 |
64 | 238,163 | 8.00% | $1,625 |
65 | 388,996 | 13.10% | $1,875 |
66 | 1,182,692 | 24.70% | $2,040 |
67 | 122,918 | 4.10% | $2,400 |
68 | 74,743 | 2.50% | $2,595 |
69 | 66,638 | 2.20% | $2,807 |
70-74 | 302,327 | 10.20% | $3,065 |
75+ | 6,317 | 0.20% | $1,185 |
Let’s look at a typical retirement scenario for a couple who has saved, but doesn’t have a Defined Benefit Pension, and see how an annuity could help in meeting their retirement goal.
Jane and Jim Smith are:
Based on these assumptions the following projections show their retirement situation at age 65.
Their inflation adjusted income at age 65 is $129,015. With Social Security and Retirement Savings, they would be able to achieve all but $8,000 with their current situation.
Let’s assume that the Smith’s take $200,000 of their $400,000 and purchase an annuity. With the following current assumptions:
This would boost their income for life by an additional $6,000 per year helping bridge the $8,000 per year gap. The annuity has the advantage of providing lifetime income as well, regardless of the investment performance or the longevity of the couple, they will get monthly checks as long as they are alive and can elect to reduce the payout, or even take a larger withdrawal amount if needed with some annuities (this can affect the payout amount in the future).
The annuity therefore addresses 2 issues and acts like the Defined Benefit Pension that they don’t have access to through their employers.
But don’t annuities come with high fees and charges?
What about taxation on Annuities?
Won’t we or our beneficiary’s’ lose access to the money if there’s an emergency, or if I die?
What type of Annuities are available to help me achieve my retirement income goals:
Each of these annuity types can be purchased with a Living Benefit Rider that guarantees a specified rollup or deferral credit rate and a guaranteed level of payout percentage based on attained or purchase age. The underlying investments during the accumulation phase can be fixed, indexed, invested in a separate account (mutual fund like), or invested in an index with guaranteed protections or limits on the amount of downside loss that can be experienced. Annuity investment options also offer differing upside potential based on the protection level desired.
An annuity is an excellent way to fund retirement, with its pension-like structure, professional money management, and the guarantee of lifetime income. There are hundreds of annuity and rider combinations that make the task of choosing the best annuity for your clients’ needs seem intimidating. The annuity selection process can be streamlined by using The Annuity Wizard. A tool available to financial professionals through their sponsoring agency. The Annuity Wizard uses a business rules engine to find the best fit annuity based on age, deferral period, risk tolerance, deposit amount, and guaranteed income, thus, taking the process from overwhelmingly complex to as simple as 10 minutes of client profiling.
The material contained in this communication is informational and general in nature. The material contained in this communication should not be relied upon or used without consulting appropriate legal or financial representatives to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules, or regulations covered.