Posted by MPS Tax

How to Avoid Running Out of Money during Retirement

How to Avoid Running Out of Money during Retirement

A lot has changed since the past decade. First, during the most recent recession, the country has witnessed retirement offerings shifted to a more do-it-yourself approach from employer-based retirement offerings just like pensions. But there are tools just like the 401(k) plans that don’t offer similar lifetime income guarantees just like pensions. In addition, retirement planning is mostly depending entirely on the hands of the employee. 

Second, Americans are living longer as a whole and this makes financial planning a long term preparation and is even more important. Nowadays, expecting that retirement will last a few decades is not unreasonable, and the risk of outliving savings will increase if you don’t have a consistent paycheck for such a long time.

There are also other factors that are making it complicated such as the growth of household debt, but on the broader point of view, retirement planning is not anymore as straightforward as it used to be. Therefore, it is not surprising that almost 90 percent of the Americans say that they are not confident enough in their retirement plans; this is according to a survey conducted in 2017.

With the rise of financial insecurity, most Americans are exploring possibilities to have a guaranteed lifetime income and help eliminate the worries on a person who could live longer than his or her savings. Often in this situation, Social Security jumps into mind, but one research has found out that most of the baby boomers are overestimating the amount they will receive with their Social Security income. As a result, people are often made aware of seeing Social Security as the only lifetime income source during retirement, especially if they don’t have a pension or other sources of income. To supplement Social Security, retirees can make use of an annuity, providing themselves for the long term with another income source.

A type of insurance called an annuity helps reduce the risk and helps provide lifetime income in the course of retirement. The annuity is paid by the owner of an annuity wither through a series of payments or through a single lump-sum payment. There might be an interest that accrues depending on the annuity type that you buy. As the value of the annuity increases, it mostly offers tax-deferred growth while protecting the owner’s principal from the market’s swings.

Generally, as soon as you are ready to start receiving income, you can choose payment options for your annuity over time in installments: monthly, annually, and others. The retirees frequently choose to receive for the rest of their lives payments on a monthly basis.

There are also other additional benefits being offered by an annuity. Not like regular savings accounts, any annuity accrued interest is not taxed until such time that you start making withdrawals. This boosts the overall growth potential. In addition, since there are some annuities that do not usually have IRS contribution limits, most of the people make use of an annuity to be able to supplement individual retirement accounts or employer-sponsored 401(k) plans.

Essentially, not all annuities are the same. To tell whether an annuity is suitable for you, it is important to ask financial professionals regarding the different types of annuities as well as the fixed and variable indexed annuities. Asking for the details of the annuity including its terms and conditions as well as when and how you can get the money once you buy an annuity is also a good idea. 

Just like the retirement calculators, there are tools that can help you have a picture of how interest rates and taxes might affect the annuity growth when compared to other products of the same nature. These tools can help you have a good grasp of how an annuity may possibly fit into your plan as a whole. Asking all about the credit rating of an insurance company, or companies, that will be responsible for issuing your annuity, as well as its financial stability is a good idea as a precaution.

If you are one of the 90 percent of the Americans who are not confident enough in their retirement prospects, it is best to discuss with a financial professional about how to be sure that you are meeting your unique needs. Avoiding the possibility of running out of money during retirement can be achieved, it only takes proper planning.

This is not a tax, investment or financial advice. It is always best to consult with a licensed professional for your concerns regarding this matter.

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