Peter Klein makes “The Case for Annuities” in a recent article for LifeHealthPro. He says that many of his clients regret not purchasing annuities sooner in their retirement, especially after losing so much money in 2008. They wish they had kept a portion of their retirement savings in an annuity and used that as fuel for their retirement plan. The author compares running out of money while you are still alive and having to rely on somewhat piddly Social Security payments to running low on gas at night on a road in the middle of nowhere. Both situations are frightening, but running on empty when it comes to retirement savings can ruin your lifestyle. In order to prevent such a scary situation, the author makes a case for using annuities to guarantee income that you cannot outlive.
People who have met with a financial professional are more likely to have saved more for retirement, as well as carry insurance protection. Annuities offer good options for keeping yourself out of a retirement income mess. By guaranteeing a lifetime income stream, you transfer longevity risk and market risk from yourself to the insurance company from who you buy your annuity. An immediate lifetime annuity offers clients a stream of income payments that will last as long as they live. While Social Security and pensions work in the same way as an annuity, annuity payments are much more and can be individualized for your particular needs. Annuity payments will be bigger the older you are when you purchase them. They are also based on the amount of the annuity purchase and your life expectancy.
The complexity of annuities can keep people away from them unjustly. Some advisors simply are not educated enough on the benefits that annuities offer their clients and push mutual funds because they can be easier to deal with. But the Government Accountability Office realizes the importance of annuities and has been working for a couple years to make them easier to buy and sell. Deferred income annuities, in particular, have gotten incentives from the government so that they can more often be used as longevity insurance. They protect Americans against the risk of outliving their money. Mr. Klein’s article offers a great diagram of the decisions that need to be made with each annuity, really simplifying the process.
Annuities can be used for principal protection, tax-deferral, guaranteed income, and many other optional benefits. Advisors should work with their clients to find the annuity that is best for their needs. Determining a client’s likely life expectancy is a good way to see what annuity will work for them. The longer you are expected to live, the greater the chance that you could outlive your retirement savings. Some people can forecast a time in their life when they think they’ll need additional income, rather than needing a stream for the rest of their life. With a period certain annuity, your payments are higher than with a lifetime annuity.
Retirement planning is definitely not easy and it has its challenges. Annuities are able to solve many of the challenges that come along with retirement. Your taxes are deferred until you start receiving payments. There is also no limit to how much money you can contribute in any given year, unlike IRAs and retirement plans. Fixed annuities offer safety by protecting your principal and guaranteeing you interest. Indexed annuities offer downside protection along with the ability to take advantage of any stock market gains. While annuities have downsides and are not perfect investments for anyone, they are worth a look for retirement planning because of their many advantages. Speak with an expert before making important retirement decisions.
Written by Rachel Summit