Suddenly, some money may need to generate income. Some may need to remain readily accessible. Some may be positioned for longer-term growth. And some retirees may want a portion protected from direct market losses.
That’s why retirement allocation shouldn’t necessarily begin with a product or an arbitrary percentage.
The Four Jobs of Retirement Money
Most retirement priorities fall into four related jobs. They overlap, they influence one another, and the right balance is personal — but naming them first makes every later decision clearer.
Job 01
Income
The job: help fund your retirement lifestyle.
If these sources don’t cover desired or essential spending, additional assets may need to help generate retirement income.
Existing income sources may include
- Social Security
- Pensions
- Employment income
- Rental income
- Other dependable sources
The question to ask
How much dependable monthly income do I need from my savings?
Job 02
Protection
The job: reduce exposure to risks you don’t want to take with certain dollars.
For some retirees, this may mean protecting a portion of retirement assets from direct market losses. Depending upon the strategy, fixed or fixed indexed annuities may potentially play a role here.
Be precise about how that protection works
- Fixed indexed annuities are not direct investments in an index.
- Negative index performance generally does not create a negative index-linked interest credit.
- Upside may be limited by contract provisions such as caps, participation rates or spreads.
- Liquidity provisions and surrender charges matter.
- Insurance guarantees depend upon the issuing company’s financial strength and claims-paying ability.
The question to ask
How much of my retirement savings am I comfortable exposing to market losses?
Job 03
Growth
The job: help retirement assets maintain longer-term growth potential.
Retirement can last decades. Completely eliminating growth from a retirement strategy can introduce other risks, including the loss of purchasing power from inflation.
Growth-oriented assets may involve market risk. The appropriate balance depends upon your objectives, time horizon, risk tolerance and financial circumstances.
Annuities are not designed to replace all market-based assets. Growth remains a distinct job with its own role in a retirement strategy.
The question to ask
Which dollars have enough time to remain positioned for longer-term growth?
Job 04
Liquidity
The job: be available when needed.
Many annuities are long-term contracts and can include surrender charges or restrictions on access.
Potential needs may include
- Emergencies
- Home repairs
- Healthcare expenses
- Major purchases
- Family needs
- Near-term spending
Money that may be needed soon generally shouldn’t be committed to a long-term strategy without carefully considering access and potential costs.
The question to ask
How much money needs to remain readily accessible?
This framework is educational. It is not a recommendation to allocate a specific amount of money to any product or strategy.
The Goal Isn’t Four Equal Buckets
Start With Your Retirement Income Gap
Before deciding where money goes, many retirees find it helpful to understand whether income is even one of the jobs their savings needs to perform.
Step 1
Essential monthly retirement expenses
Housing, food, insurance, healthcare, transportation and other spending you consider non-negotiable.
Step 2
Existing dependable monthly income
Social Security, pensions and other reliable sources already in place.
Step 3
Potential retirement income gap
The monthly amount your savings may need to help cover.
This calculation does not automatically determine how much money belongs in an annuity. It helps identify whether income is one of the jobs the portfolio needs to perform.
Same Savings. Different Allocation Needs.
Two hypothetical retirees can begin retirement with identical savings and still need very different allocations.
David
- Age 67
- $1 million in retirement savings
- Social Security
- Substantial pension
- Dependable income covers most essential expenses
David may have less need to dedicate a significant portion of his savings specifically to creating additional guaranteed income.
Priorities might lean toward
- Liquidity
- Growth
- Protection
Linda
- Age 67
- $1 million in retirement savings
- Social Security
- No pension
- Meaningful monthly income gap
Linda may place greater emphasis on creating dependable retirement income before addressing other priorities.
Priorities might lean toward
- Income
- Liquidity
- Protection
- Growth
Same age. Same $1 million. Different retirement needs — and therefore potentially different allocations.
Hypothetical Example: This hypothetical example is provided for educational purposes only and does not represent the performance or terms of a specific insurance product.
How Much of Your Retirement Savings Should Be in an Annuity?
There is no universal percentage that’s appropriate for every retiree. The amount — if any — should depend on your own circumstances.
- Existing guaranteed income
- Retirement expenses
- Retirement income gap
- Liquidity needs
- Other available assets
- Time horizon
- Risk tolerance
- Current market exposure
- Legacy objectives
- Health and longevity considerations
- The specific annuity’s features and limitations
Rather than starting with a percentage, an annuity can be considered in relation to the job those particular dollars are intended to perform — and evaluated against the contract’s guarantees, limitations, costs and access provisions.
Where Annuities May Fit
Annuities are not equally suited to every job. Understanding where they may — and may not — fit is part of an informed decision.
- Income
Certain annuities may help create contractual lifetime income, subject to the terms of the contract and the claims-paying ability of the issuing insurance company.
- Protection
Certain fixed and fixed indexed annuities may help protect principal from direct market losses, subject to contract provisions such as caps, participation rates, spreads and surrender charges.
- Growth
Some annuities provide growth or interest-crediting potential, but annuities should not automatically replace longer-term growth assets.
- Liquidity
Annuities are generally not designed to be the primary source of emergency liquidity. Access may be limited and withdrawals may be subject to surrender charges and other restrictions.
An annuity is a tool — not the entire retirement plan.
Before Deciding Where Your Retirement Money Goes, Ask:
- 01
Income
How much dependable monthly income do I already have?
- 02
Protection
How much market loss am I comfortable accepting?
- 03
Growth
Which assets can remain invested for the longer term?
- 04
Liquidity
How much should remain readily accessible?
- 05
Legacy
How important is leaving assets to family or other beneficiaries?
Only after answering those questions does it make sense to evaluate which financial products may fit each job.
The Bottom Line: Allocation Should Follow Purpose
A smarter retirement allocation isn’t necessarily about finding the perfect percentage for stocks, bonds, cash or annuities. It’s about understanding what you need your retirement savings to accomplish.
- Some dollars may need to remain liquid.
- Some may need longer-term growth.
- Some retirees may want greater protection from market losses.
- And some may need to create additional dependable income.
Once you understand the jobs, you can begin evaluating which financial tools may be appropriate for each one.
Sources
- 1.Annuities — types, features, fees and how they work — U.S. Securities and Exchange Commission (Investor.gov)
- 2.Updated Investor Bulletin: Indexed Annuities — U.S. Securities and Exchange Commission
- 3.Buyer’s Guide for Deferred Annuities — National Association of Insurance Commissioners (NAIC)
- 4.Retirement Benefits — estimating your Social Security income — U.S. Social Security Administration
- 5.Life Expectancy Calculator — longevity considerations — U.S. Social Security Administration
Go deeper in the Knowledge Hub
Educational guides that expand on the topics covered in this article.
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