With the current market conditions placing the traditional 4% retirement withdrawal “rule” into question, many wonder and worry how to stretch their retirement savings to ensure they don’t run out of money. There is an alternative to wondering and worrying: it’s called an annuity.
As I noted in a recent letter to the editor of the Wall Street Journal, easy-to-find online annuity calculators show payout annuities today providing well more in annual income than either a 4% withdrawal strategy or what is fast becoming its current alternative, the 3.3% plan.
That’s the case whether the annuitant is male or female, takes a straight annuity on their life or as a two-part “joint & survivor” annuity with another person, like a spouse or partner.
Consider this example with a 65-year-old female teacher with $500,000 in savings living in New York. If she annuitizes her savings and adds her 66-year-old male spouse as the second life on the annuity, she could lock in nearly $25,000 annually. If she annuitizes only based on her life, the payment would be more than $28,000 a year. Compare this to the old 4% withdrawal strategy, which would provide an initial $20,000 in year one. How much after that and for how long is uncertain.
And, if an advisor recommends more caution out of longevity and market concerns and recommends withdrawals starting at 3.3 percent, she’ll spend $16,500 of her nest egg in year one, $17,160 in year two and $17,845 in year three. As for how long this can go on, it will depend upon the market.
So, she could have $28,000 a year guaranteed for life or $16,500, maybe more, maybe less depending on the market. Maybe it will last throughout her retirement. Maybe not.
There are several other annuity options offering income protections throughout retirement. Some even offer increasing payments to help mitigate the effects of inflation. To be sure, putting an entire retirement nest egg into an annuity may not be the right strategy for everyone. But the longevity risk protections annuities provide must be part of any serious consideration when seeking long-term retirement security.
Jim Szostek is Vice President & Deputy, Retirement Security at the American Council of Life Insurers (ACLI). He helps guide ACLI policy on legislation and regulations affecting the U.S. retirement system. Prior to joining ACLI in 2008, he held positions at CIGNA and The Hartford.
