How can you increase your happiness in retirement? Are there secrets you can discover that will help increase your retirement satisfaction? If you’re a science-minded individual, you may want to explore what the research says about how to increase your happiness in retirement. Believe it or not, a major factor shown to be one of the biggest determinants of happiness in retirement is whether or not you have guaranteed lifetime income.
THE HAPPIEST FACTORS
Before we jump into guaranteed lifetime income, let’s cover what foundational pieces you need to have a happy retirement. According to the famous Wall Street Journal piece, “The Secret to a Happier Retirement: Friends, Neighbors and a Fixed Annuity,” having an active social life and being connected to your community increases your feelings of happiness.
In addition, how much money you have is not as big of a factor as you would think. Rather, it’s your mindset toward what you have. Andrew Oswald, economics professor at Warwick University writes, “what you have in the bank, according to the data, does not matter all that much. What really matters is the gap between what is there and what you think you ought to have. Millionaires can feel relatively poor.”1 What an important reminder!
Research also shows us that having friends and a sense of community increases retirement happiness. Friends help provide a sense of belonging, self-worth, support through difficult times, and positive peer pressure.2 So make sure you prioritize friendships if you want to increase your quality of life in retirement!
Now let’s jump into the practical, financial side of retirement satisfaction.
PENSIONS USED TO PROVIDE THIS GUARANTEE
Pensions are the original type of annuitized income. The sad news is that pensions, for so many, are long gone. According to research, retirees with a higher percentage of annuitized income were happier on a cross-sectional basis and maintained higher levels of satisfaction over time than their less annuitized counterparts.  Annuitized income simply means guaranteed regular, predictable income payouts.
Historically, this has come from pensions. With the pension crisis underway and less Americans than ever receiving any pension payments at all, this annuitized income needs to come from another source. Enter annuities.
ANNUITIES: AN OVERVIEW
The word “annuity” has the incredible power to make a person run for the hills. A quick look online and you will find campaigns devoted to decrying annuities as well as the advisors that sell them. There’s a reason for much of the vitriol; some annuities are pure garbage and deserve all the bad press.
What these campaigns fail to mention is there are annuities that can make a retirement plan stronger and more robust. The whole point of an annuity is to provide guaranteed income for the rest of your life. Ones that guarantee this and have low fees, clear terms, and positive reputations are out there. If you can find an annuity that gives you that major benefit, while having favorable terms, then you would be wise to snatch it up.
Basically, annuities are a type of contract between an individual and an insurance company. This contract can guarantee a stream of income to the person on whose life it is based. This person is known as the annuitant. The income stream is provided in exchange for either a lump sum deposit or a periodic deposit from the annuity holder to the insurance company. The interest that accrues inside an annuity is income tax deferred until it is either paid out or withdrawn.
Annuities may be structured in a variety of different ways with regard to how they are funded as well as how they provide payouts to the annuitant. The variety of choices and types gives annuity purchasers a great deal of flexibility in setting up the contract to meet their specific needs. Most financial advisors will caution you to be careful about the type of annuity you obtain. This makes a world of difference. Do not confuse variable annuities with fixed annuities. There is a major difference between the two.
How can you tell whether the annuity you’re looking at fits the bill? Well, before we start singing the praises of the “right” kinds of annuities, we need to understand where all the hostility comes from regarding annuities – and how to stay far away from the “wrong” ones.
FIXED ANNUITIES: A WHOLE DIFFERENT BALLGAME
Now let’s explore the very different world of fixed annuities. A fixed annuity is simple—a guaranteed amount of fixed interest. A life insurance company credits the annuity with the guaranteed fixed interest while assuring the principal is protected. Unlike variable annuities, this means you can never lose money.
Within this category you will also find fixed-indexed annuities. This particular type of fixed annuity has grown in popularity since the market crash of 2008. Fixed-indexed annuities have a higher income potential because of how they’re invested. The earnings from this investment are tied to the performance of the index they’re linked to (in many cases, the S&P 500) but when the index goes down, your capital does not. It’s the ultimate principal-protected growth vehicle.
Many people choose these types of annuities because of the income stream option. Once converted to an immediate annuity (where you can begin using the funds) it can be set up as income on a monthly, quarterly, or yearly basis. This is one of the single greatest benefits of a fixed annuity. As we mentioned before, having guaranteed income in retirement is a key to reducing stress and increasing peace of mind.
WHERE DID THESE ANNUITIES COME FRROM?
The catalyst for creating these new and improved annuities was proposed rules by former President Obama’s labor department that intended to require every advisor in America to follow the fiduciary standard. This basically means that every advisor would be legally required to act in the best interest of the client rather than their employer – AND they needed to be able to prove it in a court of law.
What a novel idea! Insurance companies started realizing that they needed to get their act together and provide new products that were in line with these new, client-focused rules. Basically, the overall regulatory climate changed and became more protective of clients in general. Fiduciary duty to the consumer took precedence.
WHY IS A FIDUCIARY BETTER?
Interestingly, the fiduciary standard rules proposed at that time have still not come into effect. This means that only a select few advisors actually have a fiduciary duty to the clients – it’s important to know whether your advisor falls under this category. If you work with an independent Registered Investment Advisor (like Ronald Gelok & Associates) they are bound by the fiduciary standard. Therefore, you can rest assured knowing the only investment advice or savings vehicles we provide are ones we truly believe to be in your best interest.
WHO SHOULD CONSIDER A FIXED OR FIXED-INDEXED ANNUITY?
So who should consider a fixed annuity? If you are looking for stability, predictability, tax-deferral, then a fixed annuity might be right for you. Many people don’t think too much about how big of a chunk of their retirements savings will go to Uncle Sam. Rolling a qualified retirement savings account such as an IRA or 401(k) to an annuity can save tax money because of the tax-deferral. Plus, these qualified accounts can be moved into an annuity without tax penalty.
WE CAN HELP.
If you’re curious how you could optimize your retirement or financial plan, let’s talk. You can select from any of these options:
- Free discovery call. Ask any question you want. We can help you find the answers.
- Second opinion service. Already have an advisor? We can help give you a second opinion about your retirement strategies.
- Retirement Income Roadmap. This customized roadmap spells out when and where all your retirement income will come from – and how long it will last!
- Income Tax Reduction Analysis. Our most popularly requested item. This specialized report projects by how much certain strategies will reduce your income taxes.
- Full appointment with one of our advisors. Ready to have an advisor with a passion for tax-reduction on your team? Book an appointment to get started.