Are you struggling to earn income on your investments in today’s low-rate environment while maintaining a risk level you’re comfortable with? You are not alone. Most retirees are extremely interested in generating more income in retirement, but that can be difficult to do without taking more significant risks. Let’s face it though, taking risks is not something many look to do with their money. What can you do? Here’s a look at one strategy, recently presented in an article from Kiplinger.
First, let’s look at some of the risks that arise when trying to generate income.
Duration risk
The interest on longer-term bonds is typically higher. This means that you can increase income by investing in bonds that mature later on, but you always run the risk of interest rates increasing which means the value of the security falls.
Market risk
Individual securities always run the risk of falling in value unpredictably. It’s a risk you simply cannot avoid.
Reinvestment risk
When a security matures, you will ultimately have to reinvest. Ideally, you are able to put your money in a new security at a reasonable interest rate, but again, that’s unpredictable.
Timing risk
Every investor is faced with buying high and selling low. It’s less than ideal, but unavoidable at some point.
While these are all separate risks, there’s a good chance that you’ll be facing more than one of them at the same time in your search for increased income. That is, unless you’re willing to assume just one new risk to replace all others.
An income annuity could pay up to 3% or more income while eliminating duration, market, reinvestment and timing risks. Take this scenario for example.
A 70-year-old woman has a portfolio that includes $250,000 in fixed-income securities, such as bonds and CDs, that currently pays her $10,000 per year. If she took that amount and purchased an income annuity, it would pay her $17,500 per year, an increase of 3% more income per year.
Income annuities do not come without risk though. If you live beyond your life expectancy, that extra 3% increase definitely works out in your favor. But if you should die young, and you forego beneficiary protection (an option that comes with a higher price tag), you could end up with a negative return. But there’s no such thing as a risk-free investment, and it’s up to you to determine if you’d rather assume this risk over the several others mentioned above.
There are additional benefits, according to the article’s author. For example, when you know you are earning some cash flow from an income annuity, you are freed up to take other risks in your retirement portfolio which could lead to better returns. If you live a long time and stick out any market downturns, you stand the chance of seeing historical long-term returns.
The market poses several various risk scenarios that income annuities can eliminate. Using this financial tool to balance those risks means that income annuities could improve your chances for financial success in retirement. If you have any questions or concerns about annuity products, please visit our website at www.annuityfyi.com or send us an email at support@annuityfyi.com.
Written by Rachel Summit
