When planning for retirement, being financially secure is the utmost priority. Investing for retirement as early as you can helps you establish a financial cushion that can cover your retirement needs.
On top of placing your money on stock markets, incorporating an annuity with your investment will give you a better foundation for retirement.
As the economy reaches a significant decline due to the coronavirus crisis, there exists the question of whether one must take the step to buy an annuity or wait for the stock market to recover.
In a study by Alessandro Previtero of Indiana University, he found that people extrapolate returns from the current stock market into the future. This makes them more comfortable to choose investment-based tactics once the market is in an uptrend. However, the current bear market may continue indefinitely. On that account, you may consider checking if buying an annuity is the better option.
To find out the answer, you need to understand your current financial position so you have a better vision of the size of your nest egg. Do this by determining your funded ratio. You can get this by calculating your total assets and liabilities.
Your assets consist of the value of the things that you currently own such as your financial portfolio and income sources, in addition to your real assets. Liabilities talk about your debt, namely, the balance of your loan, mortgage, and the current value of your total retirement spending needs plus the taxes.
Afterward, to come up with your funded ratio, divide the total assets by your liabilities. If the funded ratio is more than 1 or 100%, then you have enough assets that can cover all your liabilities provided that no major unexpected event will occur in the future. If it is less than 1 or 100%, it is time to re-evaluate your plans. Outliving your assets is highly possible, which means you are underfunded. This is the part where an income annuity comes in quite handy to cover your basic expenses.
The atrocious downturn of the market makes deferred annuities attractive as they provide lifetime income guarantee offering liquidity and growth whilst protecting you from the market drop. Your assets may grow less than expected due to the insurance spending to protect you from market losses, but this still provides you with an excellent benefit since you are still invested in the markets without worrying about market losses.