By Wayne Chopus
Lottery frenzies build whenever the Mega Millions jackpot crosses the quarter billion-dollar mark, invoking visions of big houses, fancy cars, and other luxuries. I bet almost no one thinks much about the parallels between lottery winnings and annuities.
If you wonder how lotteries and annuities are linked, consider that jackpot winners face a choice in how to collect. They can choose an annuity option, in which their take-home pay is higher but paid out over time, or they can select a smaller, lump-sum payout. Notably, winners tend to choose the lump sum, even though it is a smaller prize. (If you are lucky enough to win, consult with legal and financial experts on which path to choose.)
While very few people will win a lottery, millions of Americans will retire with their own “jackpot” accumulated from years of saving in retirement accounts. The size of a retirement account is not comparable to the lottery, of course, but in both cases, the goal is to not run out of money.
Unfortunately, some winners of millions in lottery cash who chose the lump sum option have ended up financially worse off than in their pre-jackpot days. The annuity option could have provided some insurance against over-spending since a winner would have received a large, annual check for 30 years.
Those folks probably thought their money would never run out. Likewise, without careful planning, many retirees may see their hard-earned savings dwindle faster than hoped. Retirement savings need to last to help pay expenses for the next 15, 20, 30 years, or even longer. Today, one member of a 65-year-old couple has a 50% chance of living to at least age 95.
Therefore, workers and retirees need to carefully plan for retirement, preferably under the guidance of a knowledgeable financial professional. The plan should consider various investment options, including annuities, to ensure sustainable monthly income. Annuities can help bridge the gap between investing in riskier assets like stocks and the fear of running out of money during retirement.
An annuity is a contract purchased from an insurance company. There are several types, but basically, a consumer pays a lump sum that the insurer uses to provide the consumer with protected lifetime income. Using part of retirement savings to generate lifetime income through an annuity offers stability by delivering a monthly check, which the insurance company guarantees to pay for the remainder of the purchaser’s life, or the lives of the purchaser and a spouse or partner. No other financial product can do that.
Establishing a protected income stream also allows flexibility to formulate a retirement investment plan that includes strategies to grow your nest egg and protect against a reduction in purchasing power due to inflation. Annuities can also protect a portion of your retirement savings from market volatility. Certain products can limit your risk of losses while still affording access to some gains.
From TheStreet’s Retirement Daily:
Several factors make lifetime income products more desirable and more accessible. Nearly 10,000 people retire daily. Only a small percentage have access to sustainable, protected income other than Social Security because workplaces have replaced traditional pensions with employee contribution plans such as a 401(k) or IRA. Research by my organization, the Insured Retirement Institute, found that only 18% of boomers who do not own annuities believe that their retirement savings will last for the rest of their lives – a sobering statistic.
Our industry also advocates for common-sense, public policy solutions to address retirees’ risk of outliving savings, and Congress is listening. Recent changes to federal law under the Setting Every Community Up for Retirement Enhancement (SECURE) Act increase access to lifetime income options in workplace retirement plans. Additional federal legislation is expected to be introduced soon to further expand access to workplace retirement plans and lifetime income products.
Dreaming of a lottery jackpot is exciting and would undoubtedly fund a lifetime of retirement if appropriately used. But you have a better chance of fulfilling retirement dreams by saving your money and working with a financial adviser on the right investment strategies to ensure it lasts.
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About the author: Wayne Chopus is the President and CEO of the Insured Retirement Institute. The Insured Retirement Institute (IRI) is the leading association for the entire supply chain of insured retirement strategies, including life insurers, asset managers, and distributors such as broker-dealers, banks, and marketing organizations. IRI members account for 90% of annuity assets in the U.S., include the top 10 distributors of annuities ranked by assets under management, and are represented by financial professionals serving millions of Americans. IRI champions retirement security for all through leadership in advocacy, awareness, research, and the advancement of digital solutions within a collaborative industry community. Learn more at irionline.org.