Market volatility has been brutal to many Americans’ savings and retirement planning. Interest rates have been low for a long time and the market hasn’t exactly been stable so far this year. These things are making many people question the stability of their retirement. According to Anna Robaton’s CNBC article “Volatility driving retirees to think longevity annuity,” many retirees are solving this retirement planning crisis by purchasing an annuity. Annuities are contracts with insurance companies that allow you to create your own personal pension plan similar to previously common defined-benefit pensions. Annuity products create an income stream and also help ensure that you won’t drawdown your savings too fast during retirement. You don’t pay taxes on your annuity until you start receiving your income stream.
Annuities can be complex, so it’s important that you are knowledgeable about your annuity product before making a purchase. You can buy an annuity from an insurance company, bank, independent broker-dealer and even on some online comparison sites. Since annuities are not backed up by any government source like the FDIC, you have to confirm the financial strength of the insurance company issuing your product. It’s not common for an insurance company to fail, but you should know that your product is strong and will continue to pay your income for as long as it is scheduled.
The article went on to discuss both deferred and immediate annuity products. Immediate annuities begin to pay you income immediately after a lump sum purchase. Fixed annuities are the most common and their payments are based upon your age, gender, amount of premium, and terms of your contract. Deferred annuities allow you to contribute money to your annuity product over time and defer the receipt of payments until later in life. Recently, some deferred income annuity products have terms that delay your payments until as late as age 85. Deferred annuities cost a lot less than immediate annuities, but some people aren’t willing to spend their money on a product that protects them from outliving their savings in the future.
It can be difficult for people to understand the real risk that most of us face of running out of money in retirement. Too many people see an annuity as risky on the off chance that you die younger than expected. But it’s crucial to have insurance against longevity risk. Longevity annuities are deferred annuity products that defer your income payments until late in life. They are a relatively inexpensive way to protect your older self against running out of money. Longevity annuities make sense for people who are likely to live a very long life based on their health and family history. Some experts recommend using 10% of your savings to buy a longevity annuity that will pay you income in the last years of your life.
Variable annuities are the most controversial annuities, despite accounting for the majority of all annuity sales each year. Your return is variable and based upon the the underlying investments within your account. Variable annuities can be either immediate or deferred. If you are considering a variable annuity, look for an insurance company that sells low cost variable annuity options. Some variable annuity fees and commissions are rather high. It’s also important to know how long the surrender charges are in effect with your variable annuity. There may be a lot of variable annuity products that aren’t valuable to you, but there are definitely variable annuities worth considering for your financial plan. Do your research before making a purchase.
Annuity products might be the solution for many of the retirees being hurt by current market volatility. Consider whether you need your income stream to start immediately or be deferred until later in life. Longevity annuities are a relatively inexpensive way to create an income stream that will begin late in your life and could pay for as long as you live. Annuities can help create an income stream and keep you from spending all of your savings in retirement and winding up broke.
Written by Rachel Summit