Annuity FYI Visitor Blog

Many investors worry about inflation when they purchase an annuity.  In exchange for a lump sum payment, annuities offer you a lifetime of guaranteed income with a fixed monthly payment.  In the AnnuityRates.org article “Should I choose an Inflation-Proof Annuity?”, the topic of purchasing an annuity that adjusts with inflation is discussed.  Buying an inflation-proof annuity links your annuity to the RPI (retail price index) so that annual rises in inflation will be matched by annual rises in your annuity payments.  An inflation-proof annuity is not the only way to protect yourself from inflation with annuity products.  You can have built-in increases with standard annuities, they just don’t have the guarantee to match the inflation percentage.

Some of the main advantages and disadvantages to inflation-proof annuities follow.  You will receive guaranteed income over your lifetime and your purchasing power will be protected against the rising prices of inflation.  You will be protected in the case of a drastic increase in inflation and the cost of basic goods and services.  On the downside, your initial income would be lower than that of a traditional variable or fixed annuity.  Your rates will also be based on a forecast of what the future inflation will be since no one knows for sure.  If the inflation rate actually went down to 0%, your income would unfortunately decrease.  There are riders to protect against deflation or no inflation, but those would also decrease your starting income.  Take these variables and use them to determine the best annuity for you and your family to be protected in the future.

In “Sidestepping Skepticism, Prudential Scores with Variable Annuities,” Matt Ackerman of Bank Investment Consultant describes how consumers’ opinions of variable annuities are changing.  While many people thought variable annuities were “too expensive or too complicated”, they seem to realize the great potential of these annuity products now.  Since retirement savings have gone down by 40% over the last year and a half, consumers are warming up to this product with its guaranteed income, protection against the market downside, and the ability to reap the benefits of an upswing in the markets.

Prudential Financial’s U.S. annuity business is very strong.  They saw a 53.8% increase in annuity sales last year, with fourth quarter annuity sales increasing 71.4% from the year before.  Their growth in the bank channel has been very substantial as well.  After adding fifteen new banks to their distribution channel last year, their bank sales of variable annuities increased by 152%.  Bank clients typically like to purchase fixed annuities, CDs, and other products that they deem “safer.”  Since the returns in those products haven’t been quite as successful for their retirement income savings, variable annuities are garnering more interest.  Prudential is sticking with this product that they believe in by introducing new products and options, and always being an innovator.

Symetra Financial’s press release “Five Steps to Retiring On Time” lists annuities as an important tool for retirement success.  A recent survey conducted by Symetra and two partners showed that nearly half of pre-retirees (45 and older) have not determined how much income they will need to take them through the rest of their lives.  Well over half of the pre-retirees didn’t think that they would be able to retire at their ideal retirement age.  With this information, Symetra has issued five steps that they believe can lead you to a comfortable retirement.

First you should “create a plan.”  Determine how much money you will need in retirement, including medical care, inflation, traveling, and other expenses.  Many estimates show that people need about 80% of their pre-retirement income in retirement.  The next step is to “manage and reduce your expenses now, before retirement.”  Cut costs where you can and pay off your credit card debt before you lose your working income.  The third step is to “diversify your investment portfolio.”  While it still will not guarantee a profit or promise no losses, spreading your investments over different products and investment styles is the best way to protect against the market.

Next you should “continually evaluate your investments.”  Changes in your life, health, job, and other areas make it important to reevaluate your goals and risk levels.  The final step is to “consider creating a guaranteed income stream during retirement.”  Annuities are one of the best products to ensure that you do not outlive your savings.  Always check fixed annuity rates and variable rates because you can find great products out there to help you in retirement.  By using a portion of your savings to purchase an annuity, you guarantee a monthly income stream coming in for life.

After President Obama’s Middle Class Task Force began the process of promoting annuities, the US Department of Labor (DOL) and the Treasury have put out a request for information, according to Money Management Executive’s “Treasury, Labor Dept. Issue RFI on Annuities in 401(k)s.  They are seeking out information on the benefits and drawbacks of using 401k annuities transfers to secure retirement income for Americans.  Since participants receive income in lifetime installments with annuities, the Treasury and DOL want to ensure that this form will work the best for the most people.

The American Council of Life Insurers was already excited about the Obama administration’s promotion of using annuities in different types of defined contribution plans.  They said in a statement that they are happy to provide information about the products to the Treasury and DOL.  The Insured Retirement Institute (IRI) will also be putting together annuity information for the departments to use in their research.  The government worries that an increasing number of retirees are opting for lump sum payments of their 401k or other plans.  With annuities, they purchase the product with that retirement money and receive a stream of income payments monthly that are guaranteed over a lifetime.  The departments’ RFI will help them gather more information for government recommendations.

The Obama administration is a big fan of annuities, according to “The unloved annuity gets a big hug from the president,” by Ron Leiber of The Boston Globe.  While President Obama did not end up discussing annuities in his State of the Union address last week, they are widely discussed in a report from his Middle Class Task Force.  Obama’s administration is promoting annuities as a vehicle to help Americans obtain a secure retirement.  In exchange for a lump sum of money at purchase, investors will receive a monthly income check for the rest of their lives.  Annuities are one of the few products to counter the longevity risk, running out of money while you are living.

The investors who were previously fearful of the risks of annuities may just take a second look at this unique product.  An immediate fixed annuity is the simplest form and the least “risky” from many viewpoints.  Variable annuities were derived from them and have their own risks and rewards.  Maybe the biggest fear investors had was losing the money if they died unexpectedly.  There are options available to add a spouse or other loved one onto your annuity to receive payments for a specified period of time if you die.  Inflation was another risk that worried investors, but with the option to purchase an annuity that rises with the consumer price index, you can avoid that as well.  President Obama may be issuing tax incentives for investors to purchase annuities for retirement along with requiring plan administrators to show employees the monthly payments they could receive with annuities to help promote them even more.