There’s a reason so many retirees appreciate having Social Security. Those benefits not only provide steady, reliable income, but they’re also guaranteed for life.
The same can’t be said for your IRA or 401(k).
Granted, you can do what you can to try to stretch your savings as long as possible, such as invest the money wisely and implement a smart strategy for withdrawals. But even then, there’s still a risk that you’ll outlive your savings.
If you don’t like the sound of that, you may want to set yourself up with another income stream that’s similar to Social Security in terms of guaranteed payments. An annuity could be the perfect solution, so it’s important to look into one if you’re worried about running out of money and want predictable cash flow later in life.
Social Security won’t cover all of your bills
Social Security can serve as a nice foundation for retirees. But those monthly benefits will not cover all of your bills — unless, of course, you’re willing to live an extremely frugal lifestyle.
The average retired worker on Social Security today collects a little more than $2,000 a month, or just over $24,000 a year. But that’s hardly a lot of money in the grand scheme of the many expenses you’ll face as a retiree.
Remember, even if a few of your bills get less expensive in retirement, some might go up. Your healthcare costs are likely to increase because they have a tendency to do that over time, and because aging tends to bring about health issues. And you might spend more money on entertainment due to having more free time on your hands.
You can expect Social Security to replace about 40% of your pre-retirement wages if you earn a typical salary. But you should anticipate needing twice that much income in retirement.
A robust IRA or 401(k) could bridge that gap. But over time, that money could run out on you. That’s why you may find an annuity to be a better solution.
It’s a matter of minimizing risk
The nice thing about an annuity is that it guarantees you money for life — something your retirement savings can’t do. And with an annuity, you don’t have to worry about market conditions, whereas with your IRA or 401(k), you need to be very careful about taking withdrawals when your portfolio is down.
Also, if you have guaranteed income coming your way in retirement in the form of annuity payments, it might give you the flexibility to invest some of your remaining savings in a more aggressive manner. That could allow you to generate strong returns that give you access to the money you need to enjoy retirement to the fullest.
But isn’t an annuity the same as Social Security, more or less?
Not exactly.
With Social Security, you earn benefits by working and paying taxes on your income. With an annuity, you pay money to an insurance company that then guarantees you regular payments. Annuities can also offer more flexibility than Social Security in terms of when payments can start.
However, at their core, Social Security and annuities do the same thing — provide you with ongoing income for life. And when they work side by side, they can lead to a lot of financial security in the long run.
This isn’t to say that an annuity is your only option for supplementing your Social Security benefits. But if you’re someone who isn’t big on risk, it’s a financial tool worth exploring.
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