Liquidity: Easily Accessible Money When You Need It
A common problem when the urgent need for money arises is the inability to liquidate assets. Your 401k, investment portfolios, and real estate aren’t easily or quickly converted to cash. While a traditional savings account won’t hedge against inflation, it does provide liquidity.
Annuities, unfortunately, do not have liquidity. Once annuitized, the amount you have elected to receive per month is exactly what you receive. There are no advances on payments or early withdrawals. So while you gain the immense advantage of guaranteed, lifetime income, you sacrifice liquidity of the savings invested into it.
Life insurance policies, on the other hand, often have a cash value that can be quickly withdrawn to cover any emergency or need. You can choose to pay the money back on a timeline of your choosing or choose not to pay the money back at all. No penalties or tax implications are sustained, making this a good option for maintaining liquidity while also allowing the funds to grow far more substantially than they otherwise would in a savings account.
Longevity: The Risk of Outliving Your Money
The biggest problem facing retirees today is the potential of outliving your money. Perhaps you have enough allocated to live ten or twenty years after retirement, but what happens if you live longer? Can your children afford to take care of you? What happens when you need part-time or full-time care?
You must ask yourself what your quality of life will be if you haven’t properly planned for the possibility of living to be 100 years old. Certainly, you don’t want to be a burden on family and being utterly reliant on the government is likely the least comfortable option of all. This is why diversification and a guarantee of lifetime income are so critical in hedging against the risk of longevity.
Retirement May Mean the Most Taxes You’ve Ever Paid
Think of all of the deductions you’ve utilized over the years: child tax credits, mortgage interest deduction, 401k contributions deduction, IRA contributions deduction, home office deduction, and more. In retirement, child tax credits are likely no more, you may be done or close to done paying off your mortgage, you are no longer making contributions to your 401k or IRA, and you no longer do work that requires a home office. In short, you’ve lost most of your deductions and now must pay taxes on 401k and IRA distributions along with Social Security earnings (which as of August of 2021 came to an annual total of $18,702.48 for the average retired worker). You will likely only be taking the standard deduction, which for 2022 is $12,950 for single filers and married filing separately, $25,900 for joint filers and $19,400 for head of household. The remaining income after this deduction in the year 2022 would be taxed as follows:
In August of 2021, the average retired worker received $1,558.54 each month through Social Security. That puts the total annual Social Security income for that recipient at $18,702.48.
Needless to say, you will likely be living off far less than you anticipated after taxes in your retirement years. This is why having a Roth IRA, Life Insurance Retirement Plan, or an annuity is so beneficial at this stage of life. All three of those income sources are received tax free, relieving you of some of this tax burden.