How Annuities Can Help You Achieve Retirement Goals

Posted by Bill Bruce on Mar 30, 2023 11:00:00 AM


Retirement planning is something a lot of people don’t think about until it’s too late. The key to meeting your retirement goals is preparing early—the earlier you start setting up income streams and putting aside some retirement savings, the better. Annuities are one tool you can use to help supplement your retirement income so you can lead a more comfortable and secure post-retirement life.

What’s an annuity? How much do you need to retire? What do you need to plan for before you retire? How can annuities help you live a more comfortable life after retirement? Let’s go over the link between annuities and your retirement finances.

What Are Annuities?

Annuities are financial products that provide a guaranteed income stream to the buyer. They’re usually broken up into two primary phases: the accumulation phase and the annuitization phase.

  • The Accumulation Phase. This is the initial investment period that can take place as a single “lump sum” payment or over the course of multiple payments. This is what funds the annuity so payouts can be made later. In either case (lump sum or repeated investments), the money grows on a tax-deferred basis if the annuity payments are deferred.
  • The Annuitization Phase. This is when the annuity starts paying out. During this phase, the annuity provides a steady, guaranteed income to the purchaser. The annuitization date is set by the buyer at the time of purchase. So, if you wanted to use your annuity for retirement income, you would likely want to set the start of this phase for the date you plan to retire.

It's important to note that annuities can be immediate or deferred. An immediate annuity starts making payments as soon as it is purchased while a deferred one starts payments at a specific future date.

Immediate annuities are often used by those who come into a large lump sum of money—such as from a lottery win, inheritance, or lawsuit settlement/decision. This allows them to turn the lump sum into a continuous cash flow that they can use to replace or supplement their income.

Deferred annuities allow the money to passively grow before the payments start—increasing the total value of the annuity fund.

What You Need to Consider When Setting Up Annuities for Your Retirement (Setting Retirement Goals)

Before setting up an annuity to fund your retirement plans, it’s important to consider a few important aspects of your retirement.

For example, what do you want to do when you’re retired? What are your expected costs? What are your assets going into retirement (including your annuities, 401(k) plans, investments, home, etc.)? What are your needs? How will you be managing your health?

What do you want to accomplish once you’re no longer working that daily grind? Do you want to run your own small business? Live at home and spend time with your extended family (while spoiling the grandkids rotten)? Or travel the world and broaden your horizons?

Your retirement goals will have a huge impact on your financial planning for retirement as they’ll affect the kinds of investments you need to make and how heavily you’ll invest. The more ambitious your plans are, the more money you’ll need to set aside for retirement.

When setting retirement goals, you’ll need to take a look at your income sources, anticipated lifestyle, healthcare costs, and other expenses.

Basic Needs (Food, Shelter, etc.)

How much will you need to spend to meet your basic living needs for food, shelter, and clothing? What are the bare minimum expenses for these basic survival costs? When setting your budget for retirement, you’ll want to make sure that you have more than enough capital available to meet your basic needs each month.

Of course, if you aren’t going to retire for a while, it can be hard to predict what your spending will be on these items in the future—especially given the unpredictable nature of inflation for basic necessities. Considering that the average rate of inflation over the last ten years works out to about 1.88%/year (Source: Forbes), you may want to look at the current prices of food and shelter, then add 2% (or more) to those costs for every year in between now and when you plan to retire.

Why 2% instead of 1.88%? Because, inflation varies from one year to the next and anticipating higher inflation rates will have a positive impact on your retirement savings and investments—leaving you better prepared for retirement. After all, if you set aside more money than you need, that just means having more room in your budget for luxuries.

Monthly Budget

After you establish what your spending for basic necessities will be, consider other budget items and how you’re going to pay for them. While your basic needs are important, setting aside some budget for other things—like traveling, going to the spa, splurging on fine dining, celebrating with your family, watching Netflix (or whatever equivalents there will be in the future), and the like—is important for promoting your emotional health in retirement.

So, it can help to create a monthly budget for all of your post-retirement expenses, including:

  • Basic living needs (food, shelter, etc.)
  • Assisted living costs
  • Utilities
  • Memberships and subscriptions
  • Entertainment/travel
  • Pet ownership costs (food, pet care products, etc.)
  • Healthcare expenses (health insurance, copays, deductibles, etc.)
  • Business expenses (if you own a business in retirement or are a landlord)
  • Insurance costs (life, pre-need, health, business, homeowner’s, vehicle, etc.)

Assets and Income

When you have a total for your expected monthly expenses, it’s time to compare that to your retirement income streams, such as:

  • Your retirement investments (401(k) plans, annuities, stock dividends, etc.)
  • Any savings accounts you have
  • Recurring payments from other sources (such as legal settlement installment payments, lottery winnings, etc.)
  • Gratuities/royalty payments on your intellectual property
  • Rent from properties you own
  • Collectible items that you may want to resell or gift to a loved one

You may also want to inspect your current assets, such as your home, vehicle, business, and valuables to determine your equity. This can also help with estate planning so you can ensure that your assets are divided the way you want instead of how another party thinks they should be.

Keeping a list of your assets and periodically updating it can be a useful way to help prepare for retirement. For example, if you had a rare trading card, it might be worth a lot of money that could help fund your retirement. The holofoil Charizard card from the 1999 Pokémon Base Set trading card game was valued at $420,000 in mint condition (Source: Sports Illustrated) and a baseball card of Honus Wagner once sold at auction for $6.6 million—topping a Mickey Mantle rookie card that sold for $5.2 million (Source: History Channel).

However, it’s important to note that the sale price of valuables can fluctuate significantly depending on the collector’s market. Speculator booms can push values much higher than the general industry can reasonably sustain, making them a less-than-ideal investment. Collectibles are more of a “nice-to-have” kind of asset unless you’re a dedicated collector yourself.


It can be incredibly hard to plan around what your general health will be in retirement. Injury and illness can take a toll on the body—resulting in people spending more on personal care in their old age than they may have anticipated.

Setting aside funds to cover health expenses, like clinic copays, medications, emergency room visit deductibles, and other costs associated with healthcare can be crucial for avoiding medical debt in retirement.


How to Calculate What You Need for Retirement

So, how can you calculate what you need for retirement to cover your basic living expenses, retirement plans, insurance, and healthcare? Using a retirement calculator (such as this one from NerdWallet) is one way to estimate your needs.

In the calculator, you simply enter your income, your current savings, your age, and how much of your monthly income you set aside for savings (plus other information depending on the calculator). The calculator then gives you an assessment of how close you are to your retirement goals based on a few different factors.

Another way to calculate how much you need for retirement is to add up your planned monthly expenses and then add 2-3% per year for every year between now and when you plan to retire. This will give you a rough idea of how much money you’ll need for each month of your retirement.

For example, say your current monthly expenses (not including a mortgage you’re about to pay off) are $3,000 a month and you plan to retire in 10 years. A 3% year-over-year increase in costs due to inflation would make that $3,090/month after one year, $3,183/month (rounded up) after two years, and $4,032/month (rounded up) after the tenth year. So, for the first year of your retirement, at minimum, you would need an annual income of $48,381 to cover planned expenses.

So, you would need to ensure you have retirement income streams equaling at least that much. If you don’t expect to get that much money from your current retirement funds and Social Security, you may want to consider setting up additional revenue streams or finding ways to cut expenses to make life after retirement more affordable.

How Annuities Can Help You Meet Retirement Goals

Annuities can be an invaluable source of a steady income in your retirement years. By setting up a deferred annuity early, you can create a guaranteed retirement income stream that supplies you with money on a set schedule—making it easier to conduct financial planning around that income.

These investments are more stable than playing the stock market and help you avoid tapping into your retirement savings for non-emergency expenditures. This can be particularly useful if you find yourself making a lot of unplanned purchases.

With the reliable income of an annuity, you can ensure that you never run out of money after retiring—helping you live a more stable and independent lifestyle so you can focus on enjoying your retirement instead of trying to earn money to cover your basic living expenses.

Want to learn more about annuities and how you can set one up? Reach out to ELCO Mutual today! Our agents are standing by to help you prepare yourself financially for your retirement. It’s never too early to start planning. ELCO Mutual and its representatives do not offer tax or legal advice. Please consult with a certified financial planner or advisor before making any major investments.

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Topics: Annuities