Annuity FYI Blog

It would be an understatement to say that the stock market has been volatile during the past weeks. As I write, the Dow Jones Industrial Average rose or fell by hundreds of points on four out of the last six trading days. A trillion dollars in savings vanished in a single day. A trillion dollars in savings reappeared on the next.

While the indexes lurch like an airliner in a thunderstorm, millions of retired Americans have undoubtedly fixed their attention on their televisions and computer screens, watching the financial news and worrying about the safety of their savings. If the market finishes up, they’ll feel relief. If it finishes down, they’ll wonder what luxury or even what necessity they might have to live without next year.

So, what to do about it? This isn’t the right time to make a dramatic financial move. It would certainly be the wrong time to sell equities. But in a few weeks or months, after the markets calm down, it will be worth remembering this week’s market turbulence and asking: when I’m 68 or 69 or
75 years old, do I want to lose sleep over the market? Do I want to be glued to the news? Do I want to be calling my financial adviser?

At that age (assuming that you aren’t so rich that you can laugh off the worst market losses), you’ll want to have already set up an income plan that will let you ignore the nightly news. That doesn’t mean putting all your money into an annuity. But it could mean buying an annuity large enough to provide a floor income that covers your basic expenses.  Describing some of the ways you can do that will be one of the goals of my posts over the coming months.

Written by Kerry Pechter

You can find more information on the best annuities by visiting Annuity FYI.

With the 500-point drop in the stock market last week, a lot of shareholders are biting their nails and monitoring the news from Wall Street. They’re dreading further losses, and some have moved their money into safe securities. That’s why the prices of Treasury securities have jumped.

If you’re reading this blog, you may also be wondering: “Is this the right time to move my money into some kind of annuity?”

There’s no easy answer to that question. Now is not the time for hasty or fear-driven decisions. But, generally, if you are near or at retirement and already planned to buy an immediate annuity or a variable annuity with living benefits to provide guaranteed income over the next 20 or 30 years, you probably shouldn’t abandon that plan. The decision to buy an annuity for income, like the decision to marry or buy a house, is a long-term, strategic decision, not a short-term tactical move.

Many people hesitate to buy single premium immediate income annuities (SPIAs) when interest rates and annuity payout rates are low (as they are today), preferring to wait until rates are higher. Is that a smart strategy?

It depends in part on where you get the money to buy the SPIA. If you have cash on hand, you may want to wait and take advantage of lower stock prices rather than buy a SPIA. But if you buy a SPIA with the proceeds of selling bonds, this might be as good a time to buy as any. You won’t gain much by waiting for higher interest rates, because higher rates may only drive down the value of your bonds.

The SPIA purchase decision also depends on your age. If you’re over age 70, you can more or less ignore the interest rate environment. Age will be a bigger factor than interest rates in determining the size of your SPIA income. In any case, I’d avoid selling depressed stocks in order to buy an income annuity—or anything else—right now.

Of course, whenever stock prices fall, some people will consider “buying the dip.” Yesterday’s share prices may or may not have represented a buying opportunity. Prices may yet drop even farther. Or they may bounce back. Not even Ben Bernanke knows. Ideally, a diversified portfolio of stocks and bonds will see you through.

But, all else being equal, during a period of high bond prices and low stock prices, a retiree who needs lifetime income could take advantage of both by selling bonds and buying either a variable annuity with living benefits or a SPIVA—a single premium immediate variable annuity. (That’s a little-used type of income annuity where the underlying assets are entirely or partially invested in equities.) When stocks make their eventual comeback, you’ll reap some of the upside. If not, you’ll have a downside buffer.

Written by Kerry Pechter

In the article “How to Use Annuities for Retirement Income,” by Philip Moeller, the author offers 15 bits of information about annuities.  The U.S. News & World Report article confirms that the guaranteed lifetime stream of retirement income offered by annuities is more popular than ever in these uncertain economic times.  One benefit of annuities is the tax deferral savings if you don’t take your payments as an immediate annuity.  There is no limit to how much money you can put in an annuity, but there is for other investments like IRAs.  Annuity investors are essentially in a pool together, so they can get higher annuity rates.  While some may live very long lives and put a strain on the insurance companies, others may not.

It is crucial to comparison shop when looking at annuities.  You not only want to compare different annuities and those from competing insurers, but also compare equity linked CDs and other investments.  Be sure to include the safety of annuities to the risk you take with some other investments.  All annuities have fees and service charges attached to them because that is how the insurance companies make money.  Comparing the fees is another crucial step to take in your annuity research process.  This article says that annuities and Social Security are very similar in style.  Social Security is essentially a flexible premium deferred annuity because your payments vary based on your income and you wait to receive monthly payments until a later date, usually after retirement.

Annuities can be purchased through a lump sum payment or a series of payments over time.  Fixed annuities offer a fixed payment over time whereas variable annuities are invested in market subaccounts and can offer the potential for a greater return.  The fixed equity indexed annuity combines the fixed returns with some market upside potential and has become increasingly popular.  Annuities can be very complicated investments and are best purchased with the help of an expert.  Some investors worry that their money will be wasted if they die prematurely.  There is the option available to receive payments for a fixed period of time or even to last throughout your spouse’s lifetime.  With each guarantee you will be charged accordingly, so finding the best annuity for you can be like putting together a puzzle.  You’ll want to work with an expert to get the right options with the right payments and costs for you.

The Insurance News Net article “Plan Ahead and Secure a Future with Retirement Annuities,” by John Mulcahy, gives some annuity basics to baby boomers looking for a secure retirement.  Retirees look to financial advisors to help them sift through all of the investment options available.   Since advisors literally have some retirees entire financial future in their hands, it is imperative that the right investment is found for each retiree.  Since the majority of people are living longer due to healthier lifestyles and medical advances, retirement annuities are an important investment.

Retirement annuities are insurance products best used as a part of one’s retirement portfolio.  They guarantee lifetime income, or for a specified period of time if you prefer, and are popular with investors looking for steady streams of money.  Annuities work much like an old traditional pension, where a lump sum payment occurs up front and money is paid out monthly, quarterly, or each year.  Some annuities even offer a lump sum payout rather than payments.  Your payments vary based on a number of factors, so it is important to be aware of annuity rates and everything else that factors into your payments.

Deferred and immediate annuities are the two basic types.  Your deferred annuity accumulates money tax-deferred until you need the payouts.  The best immediate annuities can be found through a reputable financial advisor and offer you payments as soon as you purchase the annuity.  Whether you choose a variable or fixed annuity greatly changes your terms and can make your annuity rates vastly different depending on the market.  New and improved annuities are constantly entering the marketplace, making it important to strategically plan your retirement with an expert.

In the Annuity FYI article, “From the Wreckage of the Financial Crash, Annuities Emerge as Market Safety Net,” Tristam Korten says that variable annuities singlehandedly saved many Americans’ retirement income.  Two market disasters between the decade of 2000 to 2010 saw millions of Americans lose more than half of their retirement savings in the financial markets.  The 2000 NASDAQ fall and the 2008 market collapse decimated stocks and other market investments.  One man interviewed for the article purchased variable annuities for himself and his parents after his parents lost 2/3 of their money in the collapse of 2000.  Just before the crash of 2008 he was able to secure their remaining retirement funds and his own through variable annuities.

Currently, 12% of the US population is 65 and older.  But by 2050, almost 21% of the US population will be 65 and older.  The strain that this will put on Social Security makes it an unreliable retirement source.  Since the traditional pensions that our parents and grandparents received to finance their retirement are mostly gone, there is a gap for retirement income that is increasingly becoming filled by annuities.  Your investment is usually insured from any loss and guaranteed a minimum rate of growth.  Fixed annuities have your fixed rate of return guaranteed in your contract.  Fixed equity indexed annuities link your return to a stock market index’s performance.  With variable annuities, underlying market subaccounts determine your rate of return.

Many financial professionals who were not fans of annuities at some point, believe that they are now excellent investments.  From the Director at Ohio National Financial Services to the director of financial security at the AARP, most financial experts agree that annuities should be a part of your retirement portfolio.  The payments received from an annuity after your initial investment are much like a pension actually.  Companies like Prudential and Ohio National have added additional annuity benefits to meet changing consumer demand.  The article cautions that while there are more than 15,000 annuity products in the market, many of those are not the best investments.  A financial advisor helped the man in the article grow back his own and his parents retirement savings through annuities.  But investors need to spend a lot of time and work with a reputable financial advisor before jumping into annuities.  The growth rate and principal protection of the right annuity products will carry many Americans through retirement.