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While an annuity contract is the only type of financial product to offer guaranteed lifetime income, you should not regard it as the only means of proving retirement income. Retirement planning involves defining your retirement dreams and goals and then planning how to achieve your retirement goals. With this in mind, annuities constitute a fraction of the means to your goals. Therefore, in the context of retirement planning, you should treat annuities (and their benefits) as merely a part of your general retirement plan.

Annuities are income options. Other options in the realm of investment include cash options and growth options. Any proper and diversified retirement plan incorporates elements of growth. Retirement plans for those in retirement may consist of cash options in addition to the other asset classes. Therefore, you should mix annuities- although they seek to provide a steady income stream for retirement- with other asset classes (cash and mainly growth options). In addition, you should use annuities with other income options such as Money Market Funds (MMFs) and Bonds in your retirement plan.

It is a fact that annuities emphasise stability, safety and moderate accumulation. When planning for retirement these are necessary features, since a retiree should have a steady and reliable retirement income. However, the relatively lower returns of annuities and the increased life expectancies of retirees gradually diminish the importance of annuities in providing retirement income. Many retirees seek to gain income through investing as well (growth options). Although investing in growth options bear higher risk, one must remember that even low-risk financial products may lose real value through purchasing power risk and inflation risk.

The main emphasis of retirement planning is defining your retirement goals and targets. Assume that you need an annual income stream of $100,000.00 annually to have a comfortable retirement. To expect to earn this income through annuities exclusively would be far more difficult than achieving this goal through multiple financial instruments. It is true that the annuity income would be more reliable and steady than capital gains. However, your use of annuities should be influenced by the likely amount of your reliable income stream.

For instance, if you will receive a pension and other state benefits that will cover half of the $100,000, then you only need annuity income to cover between one-third and half of the remaining shortfall of $50,000.00. The reason for this is that you should be able to earn income from a portion of your retirement savings. You should anticipate depleting some of your retirement savings for various reasons during retirement but you should retain a portion of this savings for investment. Income from investment should be a significant source of retirement income as well.

With reference to retirement planning, annuities are only part of the solution to meeting your retirement goals. It follows that heavy reliance on annuities can hamper your retirement plans or make it much more difficult to have a comfortable retirement.

Learn more about this author, Darrell Victor.
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