What do annuities offer a retirement plan? Quite a lot, actually. In Financial Advisor magazine, Jim Heafner spells out “What Annuities Can Offer A Retirement Plan.” He points out that research shows that annuities enhance your retirement income and make for a better retirement overall. Since this has been proven, he wonders why it is that so many people don’t see the value in annuities. It’s likely because they have heard one bad story about an annuity product, which they now associate with all annuities. It’s truly in your best interest to research annuities for retirement and at least see if they can enhance your income and improve the quality of your retirement years.
The first thing you need to do is figure out which type of annuity is best for your situation. The article discusses four types of annuities: immediate, fixed, indexed, and variable. All of these annuities are able to provide you with income, but that is the sole purpose of an immediate annuity. Immediate annuities do not grow in value and they do not pass death benefits onto your heirs. This concerns some people, but for many an immediate annuity is the perfect piece to complete their retirement puzzle. They meet their needs for growth and paying beneficiaries with other puzzle pieces and use their immediate annuity to guarantee lifetime income.
Fixed, indexed, and variable annuities offer you tax-deferred growth and the option of receiving lifetime income. You can also choose to pass some of the value onto your heirs in the future. This article states that an annuity is the most efficient way to convert your savings into income in retirement. There is no guarantee that you will earn more money than you would in stocks and bonds, but it is still likely that you will. Annuities eliminate the market and interest-rate risk that could cause you to run out of money in retirement. By design, an annuity should not fail. They should be purchased with long-term money because of the surrender charges you could incur if you take your money out too soon. Fixed and indexed annuities are good for people looking for low-risk growth and/or lifetime income.
Indexed annuities offer a range of flexibility and are able to meet many consumer needs. There is tax-deferred growth and you have access to the money immediately in the case of a sudden long-term care need, illness, or death. There is guaranteed lifetime income, death benefits to your heirs, and many other optional added perks. They are structured to protect you from stock market exposure, while calculating your growth based on a percentage of the stock market’s growth. Lifetime income is calculated based on an annual growth rate. Withdrawal percentages vary by individual, but are currently 5-7% on average.
Variable annuities, stocks, bonds, and mutual funds have greater growth potential that comes with a much greater risk of loss. If markets are up, variable annuities will offer better growth than indexed annuities. You also have to consider the losses you may incur with variable annuities if markets are down. Some people are willing to take the risk because of the potential reward. Variable annuities also offer lifetime income guarantees to set them apart from stocks, bonds, and mutual funds. As you approach retirement, the author recommends having four “buckets” of savings. You need emergency funds that are easily accessible. Then use annuities to guarantee predictable income that will pay your basic living expenses in excess of Social Security. The last two buckets are for growing money, one that is liquid and the other that can be passed onto your heirs.
Written by Rachel Summit