Annuity FYI Blog

Near-retirees have purchased indexed annuities (also called fixed indexed annuities or equity-indexed annuities) in relatively modest but nonetheless record numbers in the past year or so. The reason: the guaranteed lifetime withdrawal benefits (GLWB) of these products are now in some cases more generous than the GLWBs offered on variable annuities.

Why? Indexed annuities, which invest mainly in bonds, are less risky than variable annuities, which invest largely in stocks. Less risk means lower hedging costs for the insurer, which (generally speaking) enables the insurer to offer a higher lifetime payout rate. Testing one particular indexed annuity GLWB with the help of an online calculator, I seemed to be able to get an extra guaranteed $2,000 a year at age 70 (after a 10-year waiting period) than I could from a typical variable annuity GLWB. (Individual products and results will undoubtedly vary).

When I wrote Annuities for Dummies, indexed annuities did not yet have GLWBs. I did not recommend indexed annuities at the time, for several reasons. First, they were not easy to understand. Second, the past returns of apparently similar products varied so much that it seemed difficult to make an informed purchase. Third, some insurers paid huge commissions to agents, which implied a smaller share of the pie for the consumer. In a few headline-grabbing instances, the high commissions also appeared to incentivize high-pressure sales. Today, for near-retirees in need of guaranteed income (but who shy away from pure income annuities), indexed annuities might be worth a fresh look.

Written by Kerry Pechter

While 77% of people are happier in retirement than they were when they were working, retirement does face challenges that may be unexpected.  Milwaukee’s Journal Sentinel works on “Addressing the four most common post-retirement challenges.”  Longevity, or the fear of running out of money during your lifetime, is one of the biggest risks in retirement.  As many people live to age 90 and beyond, retirement savings need to stretch farther than ever before.  Health care costs are rising fast and the fact that you need more health care as you age makes this added cost a stressor for many retirees.

Becoming a widow is one retirement challenge that no one wants to think about.  But the reality of the situation is that 75% of married couples have a spouse who spends at least five years as a widow or widower.  The need for long term care of some sort is becoming a bigger challenge for retirees.  Four out of five women and three out of five men will need some type of long term care for a chronic health condition during their lifetime.

There are some solutions to these four major retirement challenges.  Annuity products help to make sure that you do not run out of money in retirement.  The guaranteed income from an annuity can last over a retiree’s lifetime and even include death benefits to last over a spouse’s lifetime.  Purchasing Medicare supplement insurance helps retirees face the increasing health care costs by covering whatever Medicare does not.  Some life insurance policies work in terms to cover long term care.  This long term care insurance is important to help cover the cost of extended care and the life insurance policy helps ensure that a widow is cared for in the tragic death of a spouse.  Insurance against financial doom will help relieve retirement challenges.

Written by Rachel Summit

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Recently I visited a website that provided financial education for people nearing retirement. An article on the site told potential variable annuity buyers to read each product prospectus thoroughly before investing.

I was slightly surprised by that. Virtually no one reads VA prospectuses thoroughly. Today’s prospectuses can be hundreds of pages long. Half of the pages focus on the mutual fund (i.e., subaccount) options, and a contract may offer scores of funds. Even advisors don’t read prospectuses; they subscribe to services that do it for them.

You should look at the prospectus, but fast-forward to the important stuff. I concentrate on three areas: the Fee Table, the section on “Optional Living Benefit Riders,” and the sub-section on “Investment Restrictions.”

On the fee table, look for the Mortality & Expense Risk charge, the current (and maximum) fee for the income rider you want (either the single-life or joint-option), the current fee for the death benefit rider you want, and the range of fees for the subaccount investments. These are your annual expenses.

Then flip to the Living Benefit Rider section. Check out the annual bonus, if any, that you can get by delaying withdrawals. Then look at the so-called “age bands” that tell you the percentage of your guaranteed income basis you can receive each year for life.

Finally, under the same section, look for a subhead that says “Investment Restrictions.” Typically, if you choose an income rider, certain high-risk funds will be off limits to you or a cap will be fixed on the amount you can invest in certain funds.

Not all prospectuses are organized exactly alike. But if you consult the table of contents (or use the search window, if you’re reading a pdf online), you should be able to find what you’re looking for quickly.

Written by Kerry Pechter

In “Why consider an annuity?,” Scott Lunsford writes in the Chillicothe Gazette that there is no better time than now to purchase an annuity.  He says that while some annuities can be complicated, a fear of many people, a fixed annuity is straightforward and offers you a multitude of benefits for your retirement years.  Since you insure your house and car with an insurance company, it is a wise decision to insure some of your retirement savings with one as well.

Fixed annuity rates are currently 3.5% and are guaranteed not to go below 2%, something that can’t be matched by many other savings vehicles.  You also are typically allowed to withdraw up to 10% of your money each year without a penalty and with death benefits, you can avoid the hassle of probate court after death.

Fixed annuities are similar to bank CDs, with the exception that they are most often bought through an insurance company rather than a bank.  Annuities are different in that they are tax-deferred and offer more flexibility than bank CDs and other savings vehicles.  They also have guarantees that last over your lifetime and in some cases, your spouse’s lifetime as well.  The author believes that everyone should at least consider purchasing an annuity, especially because of the volatile stock market and very low interest rates that we are currently experiencing.

Written by Rachel Summit

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Pacific Life has a way to increase your retirement income with their fixed indexed annuity, even if the markets don’t increase in your favor.  Their Pacific Index Choice deferred fixed indexed annuity has been popular lately as those nearing or in retirement seek to protect their savings while hoping for growth in the markets.  But in the event that the markets don’t increase, while your principal will still be safe, there is a new option available that still allows you to increase your retirement income.

The Enhanced Lifetime Income Benefit gives you the option to grow your income, regardless of what happens in the marketplace.  Your income base will increase by 8% every year for ten years if you put off taking your withdrawals for an extended time.  This can add up to a significant amount of money, especially for people who haven’t earned interest on their annuity due to a declining financial index.

The company press release gives an example of someone who purchases a $100,000 annuity with the Enhanced Lifetime Income Benefit.  By waiting ten years before taking withdrawals, the 8% increase would give this person a $180,000 income base instead of the $100,000.  Monthly payments vary based on the other options associated with the annuity, such as whether it is a lifetime income annuity or a death benefit annuity, but you could receive up to 7% annually from this fixed indexed annuity.

Written by Rachel Summit

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