Annuities and Retirement Planning
The growing demand for more predictable retirement income has led an increasing number of investors to consider annuities as a way of providing more stability to their retirement plan. They are also looking to annuities as a way to replace the third leg of the retirement income stool as a guaranteed lifetime income.
Retirement planning is a lifelong process (i.e. It's a journey and not a destination"). Depending on where you are in the journey, there are different kinds of annuities that can be best suited for various situations.
Adding Portfolio Stability with Fixed Indexed Annuities
Offering minimum guaranteed rates along with the potential for higher earnings based on the performance of the stock market indexes, FIAs have become increasingly popular in a low interest rate environment. With the prospect of rising interest rates, which can increase portfolio volatility, advisors are turning to fixed indexed annuities (FIA) for a portion of their bond portfolio. FIAs offer protection from bond and stock market declines while retaining the fixed income nature of bonds. Although the upside is limited on FIAs, investors covet the minimum rate guarantee and the benefit of locking in and preserving their gains.
A Guaranteed Lifetime Income with Single Premium Immediate Annuities
Single Premium Immediate Annuities (SPIA) have always been the vehicle of choice for investors who covet predictability and security. They are one of the only types of investment vehicles that can manage longevity risk and guarantee a lifetime income stream, much like a guaranteed pension. An SPIA provides a baseline for an income portfolio, a guaranteed income that is independent of both market and interest rate volatility. When included as a part of an overall investment portfolio, an SPIA provides the foundation of an income strategy upon which a range of investments can be layered to create capital growth and increasing income.
Some advisors suggest that it is better to wait until interest rates increase and/or investors wait until they’re older because they could lock in a higher lifetime monthly payment. Some advisors are employing a laddering strategy, purchasing SPIAs at different stages of retirement to capture higher interest rates and a higher payout rate based on the investor’s increasing age.
Maximizing Future Income with Deferred Income Annuities
Deferred income annuities (DIAs) are a more recent innovation capturing the attention of advisors and investors who want to maximize future income while protecting against extended longevity. DIAs can be especially effective for investors who have no need for an immediate income stream, but they anticipate a bigger need for income in the future. It is sometimes referred to as longevity insurance because it can be set up to turn on an income stream at a much later age. It is purchased with a lump-sum payment at an earlier age.
Using current interest rates and actuarial assumptions, the amount of future payout can be substantially higher because the insurance company assumes a shorter period for monthly payments. The advantage of a DIA over an SPIA is that the same amount of monthly payout can be purchased with less capital because of the time that passes between the purchase and the payout. If an investor dies before receiving any of the payout, a cash-refund, if purchased as an option, is paid to the DIA beneficiary.
Annuities are certainly not a cure-all for the challenges facing retirees today and they are definitely not a one-size-fits-all solution. However, when considered in the context of a well-conceived retirement plan, their unique properties can help retirees achieve financial security like no other financial instrument.
*Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. There is a surrender charge imposed generally during the first 5 to 7 years or during the rate guarantee period. Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.