Our current financial environment in America is perfect for annuities and in particular, income annuities. Tom Hegna of NAFA’s Annuity Outlook Magazine tells us why in “The Annuity Advantage: Why Income Annuities are Built for today’s Market.” He points to an article in The Wall Street Journal a couple years ago that told the story of a Florida man in his early 90’s. The man was earning less than 1% on his CDs and was terrified that his remaining savings wouldn’t last him the rest of his life. After hearing this story, Mr. Hegna has been trying to spread the word about annuities and show retirees the three ways that income annuities are the perfect product in retirement. He says that income annuities were made for this exact situation where pensions are hardly around, Social Security is in question, and markets have been tumultuous.
First of all, annuities are the only product that eliminates longevity risk. While it is not the only risk in retirement, it is the most important because it is a multiplier for other risks like inflation and withdrawal rate risks. The chance of living to an old age is very high right now, hence the large concern about outliving one’s savings. The guaranteed lifetime payments from income annuities take away the longevity risk worry and ensure monthly income throughout your life span, no matter the length.
Low interest rates have been a concern for many people who think they might need to wait to purchase an annuity. But Mr. Hegna points out that mortality credits are a much bigger portion of your annuity payment in your older age, so interest rates become less important in the overall statistics. Your payout is comprised not only of the interest rate, but also the return of principal and the mortality credits. Mortality credits are the component that allows insurance companies to offer the guarantees that they do. Buying an annuity should not be timed with what is happening in the markets, but with the time that you need the income payments in your life.
Annuity guarantees are the third benefit offered by Mr. Hegna in his article. Insurance companies guarantee your monthly income payments over your lifetime, or your spouse’s lifetime in some products. Yes, you certainly need to purchase your annuity from a company with high financial strength ratings to better your peace of mind. The reason that insurance companies can offer these guarantees is that in addition to carrying annuity products, they also sell life insurance products. The former pays you income if you live a long time, while the latter pays your beneficiaries in the event of your untimely death. Since you can’t die young and live a long life at the same time, insurance companies are able to neutralize their own risk.
Income annuities offer retirees a distinct advantage over other retirement products and should at least be considered for your retirement portfolio.
Written by Rachel Summit