Did you know that from 1998 to 2013, the number of Fortune 500 companies offering traditional defined benefit plans fell a whopping 86%? When you couple that fact with growing concerns about the future of Social Security, it’s easy to understand why today’s generations of workers are a little concerned about their potential retirement. It is becoming more and more apparent that individuals need to become more responsible for the creation of his or her own retirement income. If you’re interested in that income being as predictable and guaranteed as a traditional pension would have been, you might want to consider an annuity product.
“Historically, annuities have gotten a bad rap – which was partly deserved,” Scott Sparks, a wealth management advisor with Northwestern Mutual told Forbes. “They were high-commission, high-fee products that weren’t necessarily good for clients. But today, that’s completely been flipped on its head.”
Annuities are products sold by insurance companies that are designed to provide guaranteed lifetime income in retirement. They come in many different shapes and sizes, but typically, you purchase a contract with a lump sum of money, and your payments begin either down the road (deferred annuity) or right away (immediate annuity). Once payments start, they continue, guaranteed until you pass away, in the same way a pension or Social Security does.
Annuity products have been on the market for quite some time now, but have historically scared investors off. But just like any other consumer good, they continue to evolve to meet the changing needs of those who might need them. According to Sparks, “today’s annuities offer features and benefits designed to overcome the three most common objections that once may have made them a less-than-desirable option.”
Outdated Myth #1: If you die, the insurance company keeps your money.
Current truth: You can choose to have payments continue after your death.
There are available options that allow you to guarantee your heirs will receive the amount you initially contributed to the annuity or continue to receive payments for a predetermined time period. “There are a lot of ways you can build in these guarantees,” said Sparks. “For example, you can design an annuity so that a beneficiary will continue to receive payments for a certain number of years after you die. Or your beneficiary could receive a lump-sum payment when you die if any of your original contribution remains. And those are just a few of the available options.”
Outdated Myth #2: There’s no opportunity for growth.
Current truth: There are several ways annuities may grow in value.
It’s understandable why people may not want to lock in an annuity income stream at this time, seeing as we’re in period of historically low interest rates. But many annuity products offer more than the fixed interest rate options previously available. “Some income annuities, for example, have the potential to grow through dividends,” Sparks added. “You can also design an annuity so that the payouts adjust for inflation over time. And with a variable annuity, your principal is tied to market performance; you can choose from a wide variety of investment options that have upside potential.”
Outdated Myth #3: There’s no liquidity: Once I buy an annuity, my money is locked up for good.
Current truth: Annuities can offer the option to access your money.
Many deferred annuities offer a percentage or dollar amount that can be taken annually, without a surrender charge. Any amount above that could be subject to such a charge however. Like most retirement savings accounts, if you’re under the age of 59 ½, the IRS can impose a 10% penalty. Otherwise, you cannot make withdrawals from an annuity beyond the payments you are scheduled to receive. “Still, it’s a trade-off many are willing to make in exchange for the confidence of receiving a stream of guaranteed income they can’t outlive,” said Sparks. “Plus, only a portion of your retirement savings should be held in an annuity anyways. You need a mix of assets so that you also have money available in case of an emergency and dollars invested in other ways that have the potential for greater growth.” You can also reduce your tax burden by strategically diversifying your accounts.
As you can see, the reasons why so many were skeptical of annuity products, although just at the time, are no longer concerns. In order to keep these products relevant, insurers have made the necessary changes to suit the unique and changing needs of consumers. If you’re interested in having a guaranteed, steady income in retirement, it might be time to talk to your trusted financial advisor about adding an annuity product to your portfolio.
Written by Rachel Summit