Low interest rates are posing challenges for retirees and have been for quite some time. A lot of research gets done regarding the best investments for retirees to choose when interest rates are low. According to Morningstar’s “Interest Rates and Retirement,” Lewis J. Walker says that an inflation-adjusted annuity combined with stocks is probably the best way to guarantee that you won’t outlive your money. Low interest rates increase longevity risk. Couple that with health care costs that are uncertain and increasing and that creates a difficult financial environment.
I’ve blogged before about the Journal of Financial Planning’s study in 2010 of five different retirement strategies. Two of the strategies involve annuities and the study’s determination was that fixed annuities with an equity portfolio would be the best way to sustain your retirement. This article discusses the challenge with fixed products as rates change and there is impending inflation. With a fixed annuity rate of 4%, you are in a bad spot if interest rates rise above that, but the opposite is true if they do not. Right now fixed annuities offering returns of 4 or 5% look great when you consider CD rates of 1.15%. But back in the 70’s with high inflation and the early 80’s with high interest rates, these fixed annuities would have been duds. This is why they recommend getting some equities into the mix. Stocks nearly always outpace the rate of inflation.
Those worried about inflation should ask if there is any type of cost of living increase when looking to purchase an annuity. If that option is not available or you choose not to add it to your annuity, use equities to combat inflation with your retirement savings. Of course, you have to consider market volatility when looking at stocks. This is why combination plans in retirement are so important. You can manage the different types of risk by investing your money in many different vehicles. Many people choose deferred annuities where you don’t start receiving income payments for at least 10 years. The article warns consumers to be wary of big sales pitches and to speak with reputable advisors before making any annuity purchase.
Make sure to ask about surrender charges, liquidity options, and penalties. Know exactly how your annuity will fit into your overall retirement plan. Use them as a part of your retirement plan, taking into account inflation and tax policies with other investments. Many annuities will double your base in 10 years, no matter what happens in the markets. Ask if there is any increase during your accumulation phase, or even after you start receiving income payments. Annuities can be complex, so ask all of the questions you need to and know that you have complete knowledge of your product. Combining a fixed annuity with equities still looks to be a good way to beat longevity risk and generate a stream of money in retirement.
Written by Rachel Summit