Retirees don’t have many permanent streams of income to count on in retirement other than Social Security. While you hope you’ve saved enough in your retirement accounts, economic changes can challenge those dollars to stretch the length of your final years.
However, there is a way to create a lifelong income stream for retirement, according to Fidelity. Here’s how.
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A Lifetime Annuity
Fidelity pointed out that not only are people living longer, on average, but pensions are rare — as of 2023, only about 15% of all employees had access to a pension plan. Most people have become responsible for funding their own retirements.
A lifetime income annuity plan, however, can deliver guaranteed income without being at the mercy of market volatility.
Fidelity recommends it as a bridge between retirement plans, like 401(k) plans or IRAs and Social Security benefits.
How It Works
A lifetime income annuity is a kind of contract with an insurance company that enables a person to convert some retirement savings into income. The insurance company is legally obligated to deliver the income payments it promised when you’re ready to retire for the remainder of your life. This removes three types of risks that individuals have to deal with otherwise:
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Market risk (the volatility of the stock market)
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Longevity risk (outliving your savings)
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Inflation risk (costs of living getting more expensive than expected)
There are a couple of types of annuities to consider.
Fixed Lifetime Income Annuity
This option delivers a guaranteed income, no matter what the market does, for as long as you live, at a fixed date you pick at the time of purchase. You can add features, as well, that protect your beneficiaries, and can add an inflation-based increase option, as well.
You do give up some control with this type of annuity, by not controlling how and where the initial purchase price is invested and losing liquidity. But you also don’t have to worry about managing your account — you’ll still get that guaranteed income.
In comparison to other income-paying products like CDs or money market funds, these annuities can often result in higher payments. To put it a little morbidly, you benefit from the “mortality pool,” which is to say — those with shorter life spans essentially help to fund the pool of those with longer lifespans. The longer you live, the more money you’re likely to receive.
Three Lifetime Annuity Options
There are three options within this type of annuity to choose from:
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Life with a cash refund: You can get income payments for as long as you live, and any remaining investment can be refunded to your beneficiaries if you pass away before your original investment is paid out.
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Life with a guarantee period: You’ll receive income payments for as long as you live, and if you pass away before your original investment is paid you, your beneficiaries will continue to receive your payments until your guarantee period is up.
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Life only: You’ll receive income payments only over the duration of your lifetime. This guarantees the highest payments possible, but it doesn’t offer anything to beneficiaries after you pass.
Fixed Annuity With Guaranteed Lifetime Withdrawal
Another annuity option, for those who want to create a diversified income plan, is a fixed annuity with guaranteed lifetime withdrawal. This option can also provide guaranteed income for the rest of your life, starting on a selected date when you’re ready to start receiving income.
In this case, you also have some flexibility to access money sooner, however, if you need it. You’ll be able to calculate a set amount of guaranteed income upfront based on age of withdrawal. Like the other options, your beneficiaries can receive the remainder of your original investment when you pass away.
This also can help shelter funds from market volatility. However, as with anything retirement related, you want to be sure to speak with a financial advisor before you make any moves.
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This article originally appeared on GOBankingRates.com: Fidelity: How To Create an Income Stream That ‘Lasts a Lifetime’
