Are You Wondering How to Secure a Steady Income Stream in Retirement? Understanding Your Options If so, the options available to you must be investigated thoroughly – this includes understanding the difference between an annuity and pension plans, which will depend upon your financial goals, risk tolerance and lifestyle preferences. Generally, an annuity offers more customizable features and control than traditional pension plans while some annuities tie their returns directly to market performance, possibly yielding higher returns but presenting greater risks.
Pensions are retirement benefits designed to provide you with a steady monthly income once you retire, determined by your years of service and an amount set by your employer. Both employer and employee contribute an agreed-upon percentage of their salary towards this plan; employers typically taking on more investment risk than employees do. While a pension can help protect against outliving savings during retirement, it may not provide enough income to cover expected expenses in full.
Annuities have quickly become a popular alternative to traditional pensions. Offering tax-deferred growth and various payment options such as lifetime payments, annuities are an attractive means of creating an individual retirement strategy using multiple investments and income sources; an annuity’s flexibility makes matching savings with retirement easier.
Many people choose to invest a portion of their savings in an immediate annuity, which guarantees them a guaranteed level of income throughout their lives. Annuities can be complex, so it’s essential that you fully understand all of the available options before making your choice. A financial advisor can assist in assessing needs, comparing alternatives and creating a strategy tailored specifically towards lifestyle goals and risk tolerance.
An annuity versus pension debate should be explored because it can have a major effect on how you plan your future. Here are some factors to keep in mind:
Long Term – Lump sum pensions provide you with a one-off payout which you can invest and manage yourself to create more income, although they have greater risk than investing your own funds directly and do not protect against inflation; they may also be difficult to spread out over a longer timeframe.
Surrender Value – Barring terminal illness diagnosis, most pensions feature surrender fees that make cashing out savings uneconomical. Furthermore, pensions tend to be non-liquid investments which can only be cashed in under certain conditions (i.e. unemployment or retirement).
An annuity can be funded with assets from your brokerage account, personal retirement accounts and DC plan, as well as tied to market indices like S&P 500 so your earnings depend on market performance – this type of annuity offers higher levels of volatility but could provide protection from inflation and rising living costs while offering guaranteed rates of return. An annuity does not typically have set minimum payout rates but instead generally offers guaranteed rates of return over its lifespan.