Retirement, Investments, & Insurance for Individuals Build your knowledge How to use an annuity to create your retirement income plan

How to use an annuity to create your retirement income plan

An annuity can serve as a key part of a retirement income plan, generating guaranteed income and making budgeting simpler.
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How confident are you in your ability to create a retirement income plan that protects against future unknowns? If you’re like more than a third of Americans, the answer is “not very” or “not at all.”

One thing that can help increase your retirement confidence is focusing on guaranteed retirement income. Guaranteed income is money you can count on--the same amount, year to year, and throughout the length of your retirement. It typically comes from three sources: Social Security, a pension, and an annuity.

Social Security, at its current levels, only replaces about 40% of a person’s income. And about 85% of workers won’t ever have access to a workplace pension. Annuities, however, are an often under-utilized way to create a guaranteed retirement income stream that fits your needs and goals. This explainer can help you build your confidence in choosing and using an annuity in your retirement income plan.

Your retirement income plan starts with a retirement budget.

Financial planning in retirement isn’t all that different from financial planning in pre-retirement: Both start with a budget. To create a retirement budget, start by totaling fixed expenses, such as housing and utilities, as well as flexible expenses—travel and clothing, to name just two. Estimates are fine, and know that your expenses might change over your lifetime.

Then, add up all your sources of guaranteed retirement income. (Remember, those are Social Security, pensions, and any annuities you may already have.) Are your retirement income expenses more than your guaranteed retirement income? If so, you have a retirement income gap.

Here’s an example: Say your fixed expenses—housing, insurance, food, etc.—add up to $3,000 a month. Your guaranteed retirement income is $2,375 from both a pension and Social Security. That leaves you a retirement income gap of $625 per month. This means you have less than you need in guaranteed funds to pay the bills you expect in retirement.

Equation showing retirement expenses minus retirement income to equal retirement income gap.

What about variable retirement income?

For some retirees, there may be another source of retirement funds: variable retirement income. Variable retirement income may include current or future work plans in retirement as well as withdrawals from savings or retirement sources such as a 401(k) or IRA. But variable retirement income is just that: It may change from month to month based several factors, such as how the markets are doing. Some people try to reserve variable retirement income for flexible or unforeseen expenses such as travel or an emergency.

Using an annuity in your retirement income plan

Budget planner (PDF)

This interactive retirement income budget planner can help you get started.

To fill the retirement income gap, you have to create more sources of guaranteed retirement income gap that you control. While you can find out what your estimated Social Security benefits may be, you can’t change them. And, as mentioned, pensions aren’t typically available to most people. That’s where an annuity can come in.

An annuity acts almost like a pension: You fund it—typically over time or with a one-time amount—and then once you reach retirement age, you receive a guaranteed monthly amount. It’s a way to build certainty in your retirement budget.

Of course, annuities aren’t just for people who want to cover a retirement income gap. Some may just want to guarantee a certain amount of income in their post-work years, and an annuity helps to do that.

One note about using your annuity in retirement: If you don’t need annuity payments until a later date, you can defer them, if the annuity was funded with after-tax dollars. If your annuity was funded with pre-tax dollars, they’ll be subject to a required minimum distribution. Your tax advisor or financial professional can help figure out the specifics of your situation.

What’s next?

Which annuity may fit into your retirement income plan? Check out the differences between variable and registered index-linked annuities.

Retirement planning
Financial planning
Investing
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Before you invest in a variable annuity, you should carefully consider its investment objectives, risks, charges and expenses, as well as the underlying investment options it offers. You can find this and other information in the free prospectus, and if available, the summary prospectus, which you can obtain from your local representative. We strongly encourage you to read the prospectus carefully before making an investment.

There are risks involved with investing, including the possible loss of your principal. We don’t guarantee that the strategies described will achieve their goals.

Withdrawals will reduce the contract value and death benefit. Some withdrawals may be subject to additional charges and adjustments. Withdrawals before age 59½ may be subject a 10% early withdrawal federal tax penalty in addition to ordinary income taxes.

Annuities have limitations. They are long-term vehicles designed for retirement purposes. Annuities are not intended to fund short-term savings goals.

Annuities aren’t insured by the FDIC, aren’t guaranteed by any other financial institution, and involve risk. The risk includes potentially losing your premium invested if the issuing insurance company isn’t able to meet its obligation.

All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not obligations of, nor backed by, the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

This is not a recommendation and is not intended to be taken as a recommendation.

This material was prepared for general distribution and is not directed to a specific individual.

The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Annuity products and services are offered through Principal Life Insurance Company. Securities offered through Principal Securities, Inc., member SIPC, and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, Iowa 50392, principal.com.