Displaying items by tag: fixed annuities

(New York)

While yields have been rising over the last few weeks, the reality is that they are still near historic lows, and far below the level most retirees need in order to earn decent income, especially given how risky bonds currently appear. So, in this very difficult environment annuities have emerged as a good option, but how to take best advantage of them when rates are so low? There are a few options, but the best one is “laddering”, or buying multiple annuities over time in order to not commit your entire pot of capital at a time when rates are so low. Additionally, some annuities offer dividend payments on top of regular payouts, which can provide extra income.

FINSUM: One of the big worries right now is putting a big pot of money into annuities, only to see rates and payouts rise in a couple years. Hence laddering is good strategy.

(New York)

If there were ever a product built for steady retirement income, it is fixed annuities. With the big decline in fixed pensions, fixed annuities have become a must-have option for many retirees who need guaranteed income. They are the simplest annuity—principal and income are guaranteed, but rates are fixed. In other words, the insurance company is bearing the risk, so they get the upside, but the customer gets peace of mind. Therefore, the basic utility of annuities is to support everyday income in retirement. There are other uses too, especially in the current market environment. For example, “Right now, some fixed annuities make an attractive alternative to both bonds and CDs in a portfolio, due to the principal guarantees and interest rates offered”, says one financial advisor at Stack Financial Services.

FINSUM: The most important thing to remember is that annuities have utility in most portfolios, but they should only ever be just a portion of a portfolio. They suffer from illiquidity and are very susceptible to inflation, but they also have guarantees that no other asset class can offer.

(New York)

A combination of factors have thrust annuities into the spotlight recently. These include super low interest rates, market volatility, and a major demographic trend of retirees. With that in mind, instead of talking about annuities’ benefits, we thought it would be worth some time to focus on their downsides. Given the audience of this article (advisors), we will leave out some of the ways annuities have been mis-sold and focus on the underlying products. In terms of their core drawbacks, there are essentially three: limited upside, surrender fees, and fixed payments. Limited upside should be fairly obvious, but most annuities limit the potential upside buyers can earn in exchange for principal protection and/or fixed payments. Surrender fees are another issue, as buyers can be hit with 7-10% “surrender” fees if they try to get out of the contract and receive their principal back. And finally, fixed payments lose value quickly, especially over a long-time horizon, because of inflation.

FINSUM: Annuities are as useful as the client you are selling them to. They definitely have a role in a portfolio, but their risks and benefits need to be well understood—which has not always been the case! One key issue is that many times the same reason people need annuities—retirement cash flow security—means they are at risk of exercising one of annuities biggest downside: surrender fees.

(New York)

Most investors don’t fully understand the differences and benefits between fixed annuities, variable annuities, and fixed index annuities, so it is only natural that most clients would not even begin to understand deferred annuities and their benefits. Deferred annuities work just like other types of annuities except they explicitly defer any payouts for a set number of years. It is essentially a lump sum that gets invested, with no planned withdrawals for, say, 20 years. In many ways that makes them like an IRA. These can be very useful for clients who have are conservative in their outlook, have a nest egg to buy an annuity, and don’t need income right away.

FINSUM: In our view this is a perfect product for Millennials and Gen X who are 15 years or more from retirement. It is like a self-funded IRA and completely fits with Millennials’ bearish view of markets and the economy. It may also be a good choice for clients who tend to overspend, as this can do a good job protecting them from themselves.

(New York)

If there is a product that looks like it has a great ten-year horizon ahead of it, it might just be annuities. Just like eSports and electric vehicles seem to have a great demographic trend behind them, annuities will ride a wave of retirees into great success. However, that is not the only tailwind. The other is ultra-low interest rates, which have completely upended the role of bonds in a portfolio. They yield very little and have a great deal of risk. Understanding that, annuities have a very interesting role to play, as between the three major types: fixed, variable, and fixed index, they offer a range of options that can help replace bonds. Fixed annuities offer set guaranteed income, variable give banded income but offer some upside, and fixed index work as a hybrid between the two.

FINSUM: Annuities have gotten a bad reputation over the years because of some high fees and bad actors, but product suites have gotten better. They can really round out a client’s need for low volatility income.