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How An Annuity Can Help You Retire

The average American earns the most money during their early fifties which means that you will likely want a retirement lifestyle similar to this time period. In order to live this lifestyle you need to replace that earned income once received while employed. Social Security will only go so far so the difference needs to be fulfilled from investments such as annuities and retirement accounts.

Why does an annuity make sense to replace earned income?

While you are employed your income is generally consistent and you come to budget your life based on this income. One of the most pressing issues that retirees face is how to budget their monthly expenses using social security and retirement nest eggs. Having an annuity that pays a consistent distribution each month can help you have a solid budget in place.

Annuities are designed for use after retirement due to the penalites you face for early withdrawal before age 59 1/2. It is a great way for people to save during their highest earning years and get steady payments in retirement that resemble a paycheck.

Longer life expectancy can put a strain on retirement assets

The estimated life expectancy in the United States is 78 years for 2010. This means that if the average person retires at age 65 they will need to make sure there is enough income for a minimum of thirteen years. While the average expectancy is 78 years many people can live well into their 90's. A long life could require 30 years of retirement income and higher costs associated with inflation and health issues.

By having a lifetime annuity a retiree can be sure they will have consistent payments until death. This is very appealing to many who don't want to worry about money as they get older. The annuity industry has been changing and insurance companies continue to develop products that provide increased asset returns, lower costs, and guaranteed payments.

I'll just take distributions from my 401(k)

Most workers who have been employed with a corporation probably have a 401(k) retirement account. This is a great way to build a retirement nest egg that is tax deferred or even tax free if it is a ROTH 401(k). The problem with a retirement account like this is most people never adjust the asset allocation during their working years and few will do this in retirement. Most likely if you have never adjusted your asset allocation it is going to be growth orientated which can be dangerous in retirement age.

The last few years have shown how a retirement account can be wiped out in just a few months with the collapse in the stock market. If you had the majority of your portfolio in stocks it likely lost over 50% during 2008-2009. If you had a fixed annuity during this time your principal would be safe and your payments would continue without any concern for the stock market. This another reason why spreading your retirement assets among different investments can save you a lot of money and stress.