Four Early Retirement Mistakes Fixed Indexed Annuities Can Help Avoid… or Fix

Retirement shouldn’t be a time of uncertainty. After years of working hard, saving, and budgeting, you deserve peace of mind in this stage of your life. Although this is always the goal, one mistake or miscalculation can potentially complicate, prolong, or outright derail your retirement goals.

At Knight Strategic Wealth, we know how important having access to the right resources is when preparing for retirement. We also know that in times of financial volatility and economic uncertainty, there’s practically no room for error. If you want the financial security you’re seeking in retirement, these are four critical mistakes that a Fixed Indexed Annuity can help you avoid…or fix.

Receiving Retirement Benefits & Overspending Too Early

Recent studies show that one in three retirees spend more money than expected, or feel less confident about living comfortably due to factors like inflation. About 29% of Americans opt to receive social security benefits at age 62 – their first year of eligibility. Many pensions also allow you to start receiving payments as early as age 55. These stats shed light on how many retirees begin receiving these benefits or overspend too early – and jumping the gun like this can backfire down the road.

Despite the early access these benefits and plans offer, there’s a catch – your payments begin to shrink as time progresses. Social security payments decline by a small percentage each month if you elect to receive them before your full retirement age, and could be reduced by up to 30%. This could become an issue the longer you live.

With no contribution limits and steady monthly payments designed not to exceed your annual interest growth, fixed indexed annuities can help keep your spending habits in check. They could even offset any losses you might incur from receiving retirement benefits too early, and the lifetime payments practically ensure you’ll have a consistent income source throughout your retirement. You can’t make penalty-free withdrawals until age 59 ½, and your FIA payments will be larger the longer you wait.

Taking Your Health For Granted

Healthcare is the greatest expense you’ll likely face in retirement – and costs are only getting higher. A 2021 survey revealed that more than half of retirees are very or somewhat concerned about not having enough money to cover unplanned medical expenses, and two-thirds are worried about healthcare costs becoming too burdensome.

Their concerns are justifiable. Recent studies show that 70% of people over age 65 will require extended care at some point, and about 20% will need long-term care for more than five years. It’s estimated that a healthy 65-year old couple will realistically need around $400K to cover health expenses in retirement, while a 2019 survey found the annual median cost of assisted living is more than $46K, and a private nursing home room costs over $102K. Keep in mind Medicare doesn’t cover 100% of medical expenses, nor does it apply to most LTC costs.

The protection FIAs provide against market downturns and their crediting strategies (that earn interest based on an index’s upward movement) can be very helpful when considering costs that are likely to increase, regardless of economic conditions (like healthcare). As previously mentioned, FIAs provide a guaranteed stream of income that can cover premiums, copays, and even some out-of-pocket costs. FIAs can also help retirees manage healthcare expenses without depleting other assets.

Procrastinating on Planning

Recent surveys conducted by various financial institutions found that 55% of working Americans and 34% of millennials think they’re behind on their retirement savings, and many participants expect they’ll need about $1.25 million to retire comfortably. Even more surprising – over 66% of people aged 57-66 choose to retire early, despite having little or no savings.

These alarming statistics coincide with another study that found the biggest financial regret for many Americans is waiting too long to start saving for retirement. Most people don’t start saving aggressively until their 40s or 50s. With the expected retirement age being 62-64 years old, that’s a very small catchup window. For context, if you start saving for retirement at age 25, you’ll need to put away about $380 a month to get $1 million by age 65. If you start at age 55, you’ll have to save around $5780 a month.

One of the biggest ways FIAs can help you or avoid or catch up on saving for retirement is the fact they have no contribution limits. You can put away however much you’d like, and take comfort knowing your money can only appreciate in value. Someone in their 50s looking to catch up on retirement can contribute the $5780 each month needed to save $1 million by age 65. This isn’t possible with retirement savings accounts like IRAs and 401(k)s, which respectively have annual contribution limits of $6-7K and $20.5K.

Mismanaging Debt

More than 60% of retirees regret accumulating too much debt, and about 46% of all Americans are expected to retire with debt. According to the Federal Reserve Bank, from 1999-2019, debt levels for people in their 60s and 70s respectively grew over 470%, and 540%. The average amount of debt people aged 60-70 and 70 or older owe is respectively around $50K and $19K, and several national surveys found the percentage of households headed by an adult aged 65 or older with debt increased from 51.9% in 2010 to 60% in 2016.

Aside from mortgages or HELOCs, most people aged 60 or older owe money on car loans, credit cards, and medical expenses. Many financial experts advise against prolonging or stopping saving for retirement to pay off debt. Remember that your FIA cannot depreciate. Your contributions can only increase in value. The more you put in (and longer you wait), the higher monthly payments you’ll receive.

If you’re approaching or beginning retirement, your monthly FIA payments will come in handy with managing or eliminating any outstanding debt, and possibly prevent you from depleting other monetary funds or investments. Although FIAs are designed to be a source of lifetime income, some situations may arise where those monthly payments won’t be enough to tackle your debt. If that’s the case, remember – you have the option to make a full or partial withdrawal from your FIA.