This Underused Retirement Strategy Could Boost Your Fixed-Income Payout by 23%
As the costs of everyday essentials continue to climb, fewer Americans are finding room in their budgets to save for retirement.
A new study from Goldman Sachs uses that reality as its baseline and offers up several research-backed methods for Americans to stretch their retirement dollars. The report found one underutilized insurance strategy, in particular, could boost retirement income by 23%.
“Does the retirement math still work? The answer is no,” Greg Wilson, the head of retirement at Goldman Sachs, said on a press call last week. “Telling workers just to save more ignores the realities they face.”
Instead, the income-boosting strategy maximizes the nest egg you’ve already built by blending guaranteed annuity payments into your portfolio mix when you’re ready to retire.
How annuities can supercharge your retirement income
Annuities are insurance products that guarantee payments for life, or a specific period of time. But not all annuities are the same. In Goldman Sachs’s example, the firm looked at single premium immediate annuities, or SPIAs.
You can purchase these types of annuities with an upfront lump-sum payment right before you retire. The insurance company then begins guaranteed payments at the frequency of your choosing for the rest of your life.
Goldman Sachs found that the average annual payout among the top annuity providers was 7.1% (though this rate can change based on market conditions, sex and age of the buyer, as well as other factors).
In the example, the researchers assumed the purchase of an SPIA using 30% of one’s retirement savings, while following the typical 4% withdrawal rule on the remaining 70% of the nest egg. Combining these sources of income increases the withdrawal rate to 4.93% — for a retirement income boost of 23%.
For example, if you had $1 million in retirement savings, a regular 4% withdrawal would equate to $40,000 per year. But the blended income strategy with an annuity would net $49,300.
Allocation
Withdrawal rate
Annual income
Annuity
30%
7.1%
$21,300
Retirement Investments: 401(k), IRA, etc.
70%
4%
$28,000
Total
100%
4.93% (blended)
$49,300
SPIAs can stretch retirement savings and help optimize retirement income, too, according to Goldman Sachs.
Following the 4% withdrawal rule, it would take a typical retirement savings of $1 million to provide a $40,000 annual income. However, with a payout rate of 7.1%, the firm says an annuity can generate that same $40,000 annual income with an investment of just $563,000.
This strategy could be particularly useful for those who retired with less savings than they had hoped.
“We plan for perfection,” Chris Ceder, senior retirement strategist at Goldman Sachs, said during the call. “But the reality is there's going to be bumps in the road. Where do we build in more cushion?”
Annuities remain underutilized
Despite some of the perks, few retirees are invested in annuities.
According to the Center for Retirement Research at Boston College, just 10% of older Americans own any retail annuity, let alone a single premium immediate annuity for the sake of maximizing their retirement income.
In theory, many Americans are interested in buying an annuity. Boston College found that 54% of respondents who had at least $100,000 in savings wanted to own “a financial product that guarantees a certain amount of income for life.”
The word "annuity," it seems, is a turn-off for many. Some find annuities too complicated, and others don’t like the downsides. To be clear, there are downsides.
For one, annuities aren’t liquid. Once you purchase an annuity, the money you receive comes from a series of payments, and you can’t withdraw from the investment as you would with a bank account. Some annuity products come with steep fees, which can be higher than those of retirement accounts. And depending on your contract, payments may stop upon death and aren’t passed down to your loved ones.
“Further, even if individuals are interested in annuities, they might not know how to buy them,” the Boston College report states.
Many large banks and financial firms offer annuities, and some can even be funded through a 401(k) or IRA rollover. According to J.D. Power, customers are most satisfied with annuities from USAA, Pacific Life and New York Life.
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