Displaying items by tag: annuities

In an article for Kiplinger’s, Jerry Golden discussed how running out of money is an investor and retiree’s worst nightmare, and how annuities can help address these fears. Retirees do face challenges such as uncomfortably high inflation, soaring healthcare costs, and concerns about the viability of social payments. 

Therefore, investors need to have a solid plan to ensure that there remains steady and sufficient income on top of Social Security and other potential pension payments. The goal should be to have a growing and guaranteed income that continues throughout all types of economic circumstances. 

One suggestion for retirees with these fears is to use a more conservative withdrawal rule rather than the standard 4%. This will give an increased margin of safety and boost your portfolio’s resilience. 

This is difficult and not practical often in reality. A better approach is to integrate financial products in the portfolio which reduce risk and dampen portfolio volatility such as income annuities. 

Having an income reduces the odds of money ‘running out’ by a significant degree while also allowing retirees to let their portfolios continue to work and grow. Often, fear is an impediment for retirees from achieving their financial goals, because they are unwilling to stick to the plan through difficult conditions.

Finsum: Running out of money is every retiree’s worst fear. Annuities are one way that retirees and advisors can address these fears.

With interest rates at their highest level in decades and an increasingly cloudy economic outlook, it makes sense that interest in annuities has increased. Used properly, annuities can create a steady income and reduce overall portfolio volatility.

However, Allan Roth in a Barron’s article shares some risks that investors need to consider before investing in an annuity. In terms of simple annuities, there are two main kinds -  single premium immediate annuities and multi year guaranteed annuities. 

He says that a single premium immediate annuity is similar to a pension. Typically, these are bought through an insurance company, and it pays a defined amount every year. The benefits are that it provides cash for the rest of a clients’ life. But, the risk is that the value of this income can be diluted by inflation. This becomes more germane the longer the annuity is relied upon.

The other option is a multiyear guaranteed annuity which provides income for a certain period of time, typically between 5 to 10 years. This functions similarly to a certificate of deposit. Yields  are slightly higher than a CD especially with longer durations. However, the higher yield does come with higher risk as CDs are backed by the FDIC while these annuities are backed by insurance companies which come with higher levels of risk. 

Finsum: Annuities are seeing higher levels of demand due to increasing recession risk and high rates. Yet, there are some risk factors that investors need to consider.

In an article for BankRate, Karen Bennett discussed whether CDs or annuities are the best option for someone saving for retirement. Both are low risk compared to other options, however there are some important differences.

A CD pays a guaranteed rate of return for a certain amount of time, but the funds are completely locked up for the entire term at which point the principal is returned. However if the money needs to be accessed early, then there is likely to be a penalty which negates the earned interest and even potentially cuts into the interest. 

In contrast, an annuity is a contract that guarantees a certain amount of income for an upfront cost. Typically, annuities last for the remainder of one’s life, or it can be for a pre-set length of time. Typically, the counterparty in an annuity is an insurance company. Annuities also come in many forms. They can be structured to allow one to build wealth in a retirement account, or it can be like life insurance and pay out a benefit upon death. 

Some differences to consider are that annuities typically pay higher rates than CDs, offer similar amounts of security, higher taxes on income from CDs, and higher penalties for annuities if you need to access your principal. 

Finsum: Annuities and CDs are low risk ways to build wealth for retirement. Here are some differences to consider. 

In an article for Kiplinger, Martin Nuss discussed the benefits of owning annuities. First, it’s important to distinguish between the many types of annuities. For example, savings-oriented deferred annuities offer tax benefits and guaranteed principal. In contrast, income-based annuities function similar to private pensions and provide guaranteed retirement income. 

A pressing concern for future retirees is that social security benefits are not going to be sufficient to meet most people’s retirement needs. And, this is before accounting for the aging population and shortfall between revenue and expenditures. 

Annuities are a great solution, because it lets you save and grow money without worrying about taxes. While younger investors have risk tolerance and are willing to stomach the risk required to generate strong returns, older investors have to be more mindful of risk. Therefore, there is more demand for less volatile investments like annuities. 

For investors with less risk tolerance, fixed-rate annuities are a good choice. They function like tax-deferred bank CDs, albeit with higher returns. Annuities aren’t federally insured but tend to be offered through reputable insurance companies. Fixed-indexed annuities are ideal for retirees who are looking for short-term cash flow, while they wait for their pension or social security payments to begin. 

Finsum: Annuities can offer so much value to investors to help them reach their financial goals. Yet, it can be difficult given the variety of offerings. 

In an article for ThinkAdvisor, Sudipto Bannerjee, Ph.D. and the VP of Retirement Thought Leadership at T. Rowe Price, distilled some advice for advisors on how to educate clients about annuities. 

Recent research indicates that 70% of retirees are managing their money with the intention to preserve assets. While most of the discussion is about saving or investing, more important is how retirees will choose to spend their savings.

Given this reality, annuities offer major advantages since it comes with longevity protection, tax advantages, and potentially even income guarantees. It also reduces the risk that retirees will exhaust their savings. 

The research indicates that retirees prioritize asset presentation, and it has a major impact on well-being. And, they cite running out of money as their biggest fear. Thus, annuities can be useful to accomplish both objectives. 

We can see how this plays out by comparing the performance of retirees who have a pension against those that don’t. After 18 years of retirement, retirees with a pension only saw a 4% drop in assets, while those without a pension saw a 34% reduction in total assets. 

Finsum: Annuities are a great option for investors especially since a guaranteed income leads to increased preservation of assets.