Annuities: One Leg of a Three-Legged Stool

Financial planners often use a simple analogy to explain retirement income: a three-legged stool. The three legs symbolize Social Security, pensions, and personal savings.

But where do annuities fit?

On one hand, an annuity is a self-created pension plan. On the other hand, an annuity is created from personal savings. But it may be best considered as a different leg that replaces pensions.

Why? Pensions are quickly becoming a thing of the past. They are nearly a relic of a bygone era.

At one time, 88% of private-sector workers with a workplace retirement plan had a pension. That number is now closer to 33%, according to the Center for Retirement Research at Boston College. And as pensions have gradually disappeared, annuities have taken their place, given their similarities. Both provide a guaranteed stream of income for life.

Regardless of where you place an annuity in a retirement plan, however, an annuity can play an important role in assembling a nest egg that can keep you comfortable throughout your golden years.

As evidence, consider a recent study from Global Atlantic Financial Group, which found that retirees who collect income from annuities can sustain much higher expenses than those who do not collect income from annuities. How much higher? The average retiree with an annuity spends 37% more than the average retiree without one ($2,545 per month versus $1,850 per month).

Moreover, retirees who had annuities were considerably less likely to have regrets about their retirement-planning choices than those who did not have annuities (42% of those with annuities had regrets, while 58% of those without annuities did.)

The key takeaway: As pensions have declined, uncertainty around Social Security has grown, and personal savings have often proven inadequate, the three-legged stool needs a replacement leg as another source of income for retirees.

An annuity can fill that role very well.