A happy retired woman out for a walk, enjoying her retirement

If you're like most people, you're looking forward to a long retirement. But what if that retirement is longer than you thought? Turns out, more Americans are worried about outliving their retirement income than they are about dying.

How can you stretch your resources to make sure you have a comfortable retirement and pass on what's left to the next generation? Here's the solution I recommend to many of my clients: use life insurance and an annuity to create better retirement income strategies. An annuity is one of the best retirement income streams available.

Did You Know: The average retirement income per year for people 65+ is $47,620 (as of 2021, according to the U.S. Census Bureau).* Do you consider that a comfortable retirement income?

Step 1: Retirement Income Planning with Annuities

You'll never outlive your assets with an annuity. Never is a strong word, but in this case, it applies.

What is an annuity? That’s simple – it’s an insurance product you buy from a life insurance company. You can pay into it all at once or over a period of time. When you want to retire and start taking payments, the insurance company will pay you every month until you pass away. There’s no chance that money will run out because your contract with the insurance company specifies they must continue payments until you die. It’s guaranteed retirement income.

Elderly man smiling and looking at family photos, enjoying his retirement

There are things to be aware of about annuities. For example, if you decide you need your cash back before you start taking payments, there will be a surrender charge. It’s best to use money you don’t need to live on when you’re buying an annuity. Different types of annuities offer a range of interest options, too. Fixed annuities offer a fixed rate of interest, for example, while indexed annuities offer interest crediting options that reflect market performance.

Annuities work particularly well for clients in their 50s and 60s because they usually have assets ready to cash out: a 401(k), a pension, or a CD. Pulling your money out of an asset like this and putting it into an annuity ensures you won't outlive your retirement account, and you'll even be able to leave something behind for your kids, 100% tax free.

Here's how it works:

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  • Buy an annuity with a lump sum. Any of the assets listed above can fund your annuity right away. That means you can start taking monthly distributions immediately. Or, if you're not quite ready to retire, that money can earn interest until you are ready. Either way, when you retire, the annuity provider issues you a check every month for the rest of your life. It doesn't matter how long you live—the checks keep coming.
  • Use part of your lump sum (or your annuity proceeds) to buy a life insurance policy. The reason I suggest this is because passing on an annuity to your children is likely going to result in an annuity inheritance tax burden for them. Let's say you pass away unexpectedly and your annuity still has $300,000 in it. If your contract specifies that the remainder goes to your beneficiary as a death benefit, this influx of cash could push them into the 45% tax bracket. That means they could lose almost half of what you want to give them. Life insurance can keep that from happening.

➡️ Need help calculating retirement income? I can help! Click the button below to schedule a call and let’s talk about getting you guaranteed income.

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Step 1: Retirement Income Planning with Life Insurance

If you don't already have life insurance, time is of the essence. Age and health affect the policy's price, so you want to buy as early as possible. If you already have life insurance, I can help you evaluate your policy to make sure it's still right for you. For example, lots of people in their 60s convert term policies that are about to expire into permanent policies to keep from having to buy a new policy, take another medical exam, and pay higher rates.

Permanent life insurance offers three key benefits in retirement income planning:

    Senior couple sitting at the table together researching retirement income annuity options online
  • Cash value. Permanent life insurance builds cash value over time. The earlier you buy a policy, the longer you have to let that cash value grow based on compounding interest. That cash value is yours to use as you like, for supplemental retirement income, unexpected medical expenses, or just having fun during your golden years.
  • Access the death benefit if you have a terminal illness. Almost all policies allow you to dip into the death benefit if you’re diagnosed with a terminal illness (for zero cost, usually). It decreases the amount your beneficiaries will get, but it can help you pay for treatment, transportation, hospice, and other needs.
  • Access the death benefit if you need long term care. For an extra cost, you can add a rider that lets you dip into the death benefit if you need long term care during your retirement. If you need an in-home health aide, for example, your policy’s death benefit can pay some or all of those costs.

Permanent life insurance also offers three key benefits in estate planning:

    Happy retired couple sitting next to each other on the couch, looking at each other and smiling
  • It can help divide an estate evenly between your kids. Let's say you're not planning on having a lot of cash left over, but you will leave a home and a business. How do you divide that estate between three or more kids? Life insurance makes it easy. If you have physical assets that you want to leave to one child, leave a comparable life insurance death benefit to the other. This is called estate equalization.
  • The life insurance death benefit doesn't get held up by probate. It can take six months or longer for a will to go through probate. Suppose one of your kids isn't financially secure. Can they wait six months for the inheritance you left for them? What if they need that money now? With life insurance, they'll get that money right away. All you have to do is be sure your beneficiary list is up-to-date, tell your beneficiaries to contact your insurer after you pass away, and the insurance company does the rest.
  • The life insurance death benefit replaces cash your kids have to pay in tax. If you leave cash to your kids, they'll have to pay income tax on it. If your estate is valued at more than about $12.92 million in 2023 (this number changes about every year), your kids will have to pay a 40% estate tax in order to inherit it. This can add up to a lot of out-of-pocket spending. It's common for kids to have to sell assets to round up the cash needed to pay the estate tax. That's not what you want for your family. Life insurance can provide the cash needed to handle any necessary estate tax. Plus, if you leave life insurance instead of cash, your kids won't pay any income tax on the death benefit. It's theirs free and clear.

➡️ Adding a lifetime annuity and life insurance to your financial portfolio helps create a more secure retirement. Ready to get started?

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*Annuity.org, “Average Retirement Income: What is a Good Income for Retirees?”, accessed 4/5/23