“Annuities are a worthy option for savers looking to add an element of protection to their retirement strategy. The key: Work with an independent adviser and understand WHY each product is being recommended.”
Kiplinger’s recent article, “4 Questions to Ask Before Adding an Annuity to Your Retirement Plan,” reports that annuity sales have been on the rise as the financial industry shifts (because of aging Baby Boomers) to a greater focus on preservation and income-driven products and strategies away from higher risk accumulation. Many also want to use annuities to create their own reliable income strategy, if their employer doesn’t offer a pension.
Investments and insurance policies aren’t “one size fits all.” This is especially true with annuities. These products can be structured in different ways. Immediate annuities are annuity contracts purchased with a single lump sum, with payments beginning almost immediately. They guarantee an income stream you can’t outlive. Fixed annuities are like certificates of deposit, but without FDIC insurance and with higher penalties. They blend safety of principal with returns tied to an external market index. Variable annuities offer the full growth potential of the market with the full downside potential. To be sure you’re getting the annuity that can help you best with your retirement goals, work with an independent adviser.
Here are the pros and cons of an annuity. The cons:
- You’ll potentially make less than if you’d invested directly in the S&P 500.
- You’ll have limited annual withdrawal privileges.
- There can be high penalties for distributions above your free withdrawal privileges.
- The terms (surrender charges) are extensive, usually from five to 15 years.
The pros include the following:
- The long-term average accumulation rate is currently better than that of other conservative financial vehicles, like CDs and investment-grade bonds of similar maturity.
- Your principal is protected from market losses by an insurance carrier.
- Riders can be added for a guaranteed death and long-term care benefits, regardless of insurability.
- Riders can be added to generate guaranteed lifetime income that’s usually at a higher rate than an immediate annuity without losing total control of your contract.
Annuities are a solid option for savers looking to add an element of protection to their retirement strategy. If structured right, you can benefit from a consistent and reliable income stream in retirement, principal protection can allow for an increase in equity exposure and growth potential for the rest of your portfolio. You may also choose to add long-term care and death benefits.
Reference: Kiplinger (November 2017) “4 Questions to Ask Before Adding an Annuity to Your Retirement Plan”