You have probably read articles on why you should buy or invest in annuities. These articles, of course, focus on the guarantees you get in the contracts.
You may also read articles on why you shouldn’t invest in an annuity. These latter articles are usually written by financial planners who look at these products from the strictly financial viewpoint of a wealthy person. These people need tax deferred investments with maximum flexibility during the accumulation phase of their careers. They will normally put the maximum into a 401k, possibly a profit sharing plan, and then a very flexible version of a variable annuity where the fees are lower.
Here, we are concerned with issues facing average middle class families, who have limited savings and are struggling to get by.
How Are You Saving For Retirement
You have probably been working for a number of years if you are reading this. You may have a family, a house, some kids, and little in the way of savings. You might be focusing on putting money away to pay for the kids’ college education, or you might have just finished so you have a lot of loans outstanding.
You are probably covered under some kind of retirement plan at work and may consider this as your annuity at retirement. You might also be covered under a 401k plan. If so, you most likely have not saved any amounts to supplement those plans in retirement since you have had so many other expenses.
Now, you are wondering about retirement and will your retirement plan be sufficient, even with Social Security. You are right to wonder and it is good to plan ahead.
Order of Savings
Here is a simple list showing the order of how you should save:
- Emergency cash fund for unexpected large expenses – new roof, new refrigerator, medical, etc.
- Savings account, CDs, College IRA’s to save for future known expenses – college, eventual new car, etc.
- 401k, if any – put in as much as you can, but at least as much necessary to get the employer matching contributions
- IRA’s – since you have a retirement plan or 401k, go for a Roth IRA so that it is tax free in retirement
- Deferred Annuity – start small, but add a certain amount of dollars every month to a deferred annuity
You should never be so overloaded with house expenses that you cannot save any money in savings and retirement accounts. If you are, you might consider moving to a less expensive house since you could be in danger down the road of losing the house if you aren’t planning for the other expenses that will come.
You need to plan your financial life and this includes saving more for retirement than the amount you will get from your pension at work. Your salary should be able to cover your house expenses, a contribution to an emergency fund, contribution to an IRA, and still have some left over to put in an annuity for retirement. If you cannot meet all of these, start considering ways to reduce monthly expenses. Sounds crazy, doesn’t it? This is a real problem for the middle class family, but it can and must be done. Once you start looking at expenses, you will be surprised how many of the monthly luxuries we can cut out and not really miss them.
If you are already at bare bones expenses, then it’s time to search for ways to get additional income. This could be second job, or turning hobby into an income business.
You Need More Retirement Savings
It might be comforting to look at your retirement plan and see your benefit accumulating. The problem is most companies do not give you projections of what your benefit will look like with future inflation taken into account. Inflation is the killer to a retiree. It is for this reason that you are probably not saving enough for retirement.
An IRA is one way to help save up to $5,000 per year for retirement. However, you need still more.
Consider Opening a Deferred Annuity
A deferred annuity is simply a contract in which you will contribute a certain amount to each month after tax and then start receiving monthly benefits when you retire. These annuities are either fixed annuities in which you are credited with a fixed interest rate each month. Or, the annuities can be variable in which your money can be invested in various mutual funds. Either way, you do not have to put in large contributions.
You can begin a deferred annuity at any point in your career and put is a contribution each month. These can be started with as little as a $25 or $50 monthly contribution. The insurance company can even be given the permission to withdraw the desired amount out of your checking account so that you do not have to decide whether to write a check each month.
Plan Ahead and Pay Yourself First
Contributing to an IRA and a deferred annuity follow the general financial planning concept of paying yourself first. This means you save first, and then pay your expenses. If you do not have enough money left to cover expenses, you then go through the process of reducing expenses or increasing income as noted above.
What you do not want to do is pay all your expenses and then save whatever is left over. The reason is that you will spend all your income and never get around to saving for retirement. When you approach retirement, you will then realize you don’t have enough saved. You also won’t have enough time left to accumulate the necessary amount for a comfortable retirement.
It would be easier now to just procrastinate, work and spend, and then deal with the retirement question in your late 50’s. You might also tell yourself that you will just get a part time job in retirement and everything will be fine. Maybe it will. Then again, maybe it won’t be fine.
A small contribution now to a deferred annuity contract will give you an extra monthly retirement check coming in at retirement. This payment will supplement your normal pension and Social Security checks. An annuity is the only product that can give you a guaranteed payment at retirement.
Focus on planning, cutting expenses, increasing income, opening an IRA, and buying a deferred annuity contract. You will be glad later on that you did.