• 6-Minute Article
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  • Sep 27, 2024

How RILAs Can Help You Prepare for Retirement

The benefits of a registered index-linked annuity – including a level of downside protection, the opportunity for growth, and ability to receive guaranteed income with a rider – may help people transitioning to retirement.

Questions this article can help you answer:
  • How might a registered index-linked annuity (RILA) help me during volatile markets?
  • How could income from an annuity impact my strategy for claiming Social Security benefits?
  • How does a RILA provide an opportunity for growth?

As you approach retirement, working with a financial professional can help you determine the best way to generate income from your portfolio. A strong retirement portfolio can include multiple sources of income, including Social Security benefits, a pension, and investment accounts, such as 401(k)s and IRAs. A financial product that is becoming more popular – and offers growth opportunities, a level of protection in down markets, and a stream of guaranteed lifetime income – is a registered index-linked annuity (RILA) with an income rider.

Helping to ensure that your savings lasts throughout retirement can depend on market performance leading up to or in early retirement. For example, poor performance when you begin taking income can deplete a portfolio faster and have a lasting impact on overall finances because there is less available capital to take advantage of potential future market upswings. This is known as sequence of returns risk, which is the risk that the order – or sequence – of investment returns will negatively impact the value of a portfolio over time. For definitions of many key words and phrases related to RILAs, view our RILA dictionary.

A RILA, also called a buffered annuity, has several benefits. It provides a level of protection in down markets and offers growth opportunities in up markets by tracking the performance of well-known indices. That ability to potentially grow a portion of your assets may help create additional wealth you can use during your retirement years. A RILA with an income rider typically has an associated fee, but this type of annuity can help you maximize your income in retirement and could help you pay for living expenses no matter how the markets perform. The availability of this income could also give you the opportunity to delay drawing down other retirement accounts or withdraw less from other assets, allowing time for those investments that may have been impacted by a market decline to potentially recover.

The level of protection a RILA provides can help you better withstand some market volatility and help that portion of your portfolio stay on track, which can help you feel more confident that you’ll have enough income to last throughout your retirement.

Here are some ways a RILA or a RILA with an income rider may help investors nearing or just entering retirement:

  • A RILA offers a level of protection in down markets1
  • By tracking the performance of an index or indices, a RILA can provide market growth opportunities in up markets, which can be important for addressing both longevity and inflation concerns
  • Guaranteed lifetime income provided by a RILA with an income rider could help supplement other sources of guaranteed income, such as your Social Security benefits2

A RILA Can Provide Options As You Near Retirement
 

Market volatility can be challenging for any investor, but it can have a particularly tough impact on those preparing to retire or in their first few years of retirement. A 40-year-old may be able to wait for the market to rebound, but someone in the early years of retirement may be drawing money from their investment accounts to help pay expenses. Taking regular withdrawals during a market downturn can further erode account values; therefore, there would be less money to participate in the potential growth when the market recovers. That can make a significant difference in a retiree’s portfolio and reduce the length of time savings can last in retirement, which could force spending cuts to help preserve assets.

The level of downside protection that a RILA offers helps ensure that a portion of your portfolio may not be impacted as negatively in down markets. Additionally, the guaranteed income from a RILA with an income rider typically stays constant once you start receiving it so you can rely on that income stream throughout retirement.3

Income From a RILA May Help You Feel More Confident About Longevity

According to the Social Security Administration, the average life expectancy for someone turning age 65 in 2024 is around 85 years old, with many people living even longer.4 That means you can expect about 20 or more years of expenses in retirement on average. The benefits of a RILA with an income rider include the opportunity to have guaranteed income, which may help you feel more confident that no matter how many years you have in retirement, you’ll be better prepared financially.

How an Annuity Could Impact Your Social Security Claiming Strategy

For someone nearing retirement, choosing when to start claiming Social Security benefits is one of the most important decisions you will make. Social Security benefits are often a significant component of a retiree’s income. It’s important to know that for anyone born in 1960 or later, the Social Security Administration defines “full retirement age” as age 67. You can begin claiming your Social Security benefits as early as age 62, but if you do, your benefits (and spousal benefits) will be reduced by up to 30%.5 On the other hand, if you delay claiming your Social Security benefits until age 70 or later, your benefits may increase by up to 24%.6

Waiting to Claim Social Security Benefits Can Have a Big Impact

Comparison of starting monthly Social Security benefit payments at ages 62, 67 (full retirement age), and 70:

Waiting to Claim Social Security Benefits Can Have a Big Impact

Sources: Starting Your Retirement Benefits Early; Social Security Administration, as of July 2024. If you were born between 1960 your full retirement age is 67; Social Security Administration, as of July 2024.

Hypothetical example for illustrative purposes only. This scenario assumes that the monthly benefit at full retirement age is $1,000.

If you want to maximize your Social Security benefits by delaying your claim until age 70 but still need accessible income, a RILA with an income rider may help. You may be able to begin taking income from the annuity when you retire and use that money to help cover your expenses, allowing you to delay claiming your Social Security benefits until it reaches its maximum value.

How a RILA Can Help You Prepare for Retirement
 

Retirement today is vastly different than it was for previous generations. While your parents or grandparents may have had access to a pension that would provide them with income throughout retirement, now the responsibility of saving for retirement falls on the individual in many instances. And because people are living longer, there are potentially more years of expenses to pay for. As a result, it’s important for those approaching retirement to consider the following:

  • Continuing to allow your assets the potential to grow in order to have a larger nest egg
  • Adding some protection for your assets in the event of down markets
  • Making sure you have guaranteed income sources that will last throughout your retirement years

A financial professional can help you determine your income needs in retirement and if a registered index-linked annuity – with or without an income rider – may be able to help address these factors.