Retiring With Annuities
With the “new normal” economy ushered in after the financial crisis comes the new rules for retirement that now guide the plans for anyone intent on retiring securely and comfortably. The financial crisis was merely the final straw for a whole generation of people who had, at one time, had their sights set on a timely retirement. For at least three decades the savings rate had plummeted. People were more interested in consuming than saving. Then the tech implosion of 2000 burst the bubble of pre-retirees by wiping out a quarter of their retirement accounts. Hoping to ride the home equity gravy train to retirement, people were then hit with a double whammy of a housing crash and a stock market crash that wiped out as much as 60% of their net worth. The new bottom line is that retirement is no longer such a sure thing for most people, which is why annuities are suddenly making such a strong comeback.
Going back as far as the Great Depression, when savers had to abandon the failing banking industry, annuities have been the “go-to” vehicle in times of uncertainty. Now, as life spans are expanding and economic uncertainties become the norm, people are again turning to them to inject stability and predictability in their financial futures. The new rules for retirement dictate that, in order to meet your savings and income goals, you may need to take on more risk than you would normally tolerate to keep your assets growing throughout your lifetime. In a retirement portfolio, annuities can serves several purposes to help ensure better returns while building an essential safety net.
Using Annuities to Shore up Your Retirement
Annuities as a Low-Risk Growth Vehicle
Studies clearly show that people will need to achieve higher growth rates on their assets both before and during retirement. The old rules implied that one had to be able to tolerate more risk in order to achieve higher returns. The new rules, adopted in light of some new investment product options, say that doesn’t have to be the case. Some of the new options available in variable annuity products can provide both growth potential with a layer of protection.
For six decades, variable annuities have provided long term investors with a tax advantaged alternative to mutual fund investing. Offering the same type of diversified, professionally managed stock and bond accounts, variable annuities have enabled investors to achieve market returns while providing security for their family with a guaranteed death benefit. Some of the newer options available will also provide protection against market declines by guaranteeing a minimum rate of return or a minimum income upon annuitization. You pay an extra half to three quarters percent for these added guarantees, but with so much at stake, they can be priceless.
Indexed annuities also offer opportunities for market-like returns with no downside risk. The rate of return is linked to a stock index which gives it upside potential, yet they provide a floor below which your rate cannot drop. Your funds will always be growing. The caveat is that the investors can only participate in a portion of the gain in the index (i.e. 70% participation rate) and then the actual credited rate is capped at some level (i.e. 8%). So, the best case is that you will earn a maximum of 8%, and the worst case is that you will only earn 8%, even if the index increases by 20%. But, you will never earn less than the minimum guaranteed rate.
With both variable and indexed annuities, there are costs that you wouldn’t pay in alternative investment vehicles, as much as 2.5% in a variable annuity and the cost of a capped rate in the indexed annuity. But, for people taking the long view of achieving consistent, positive returns year after year, there are no other investment vehicles that can match them.
Annuities as an Income Safety Net
Arguably, the greatest concern among pre-retirees and retirees is the possibility that they will outlive their income. People are starting to get it that they are living much longer than past generations. And they also get it that their primary source for income is going to be their own retirement assets that they accumulate. The new rules of retirement state that, “if it is to be, it is up to thee,” which means that we can really only count on ourselves to make sure we have a secure and sustainable income for the rest of our lives. As has been the case for centuries, annuities are the only retirement vehicle that can guarantee you don’t outlive your income. When a lump sum of capital is annuitized, a life insurer establishes a fixed payout that is calculated to last until your life expectancy. And if you live beyond your life expectancy, as an increasing number of people are doing, the insurer is still obligated to continue your payments.
Options available with today’s annuities can also ensure that your income keeps pace with inflation. Income from variable or indexed annuities can rise as the markets rise, and while it can also drop in declining markets, there are options available that will guarantee a minimum level of income. Again, any options that enhance your protections and guarantees will add to the cost of the annuity, but, in essence, what you are really paying for is added peace-of-mind.
Don’t Forget the First Rule of Retirement Planning
The first, very critical rule of retirement planning, no matter your stage of life, is to have a plan with well-defined, quantifiable targets. That hasn’t changed. Nor has the rule that states the need for a well-balanced and diversified approach to asset allocation – just ask those who had 80% of their retirement assets invested in the stock market in 2008. Your goals should be based on an actual budget for a realistic standard of living that may not be the “dream” retirement, but one in which you are comfortable. One of the new rules of retirement is that it is no longer a sin to work while “retired”. Most people today not only expect to earn a living after 65, they look forward to it. Retirement today is becoming a whole new cycle of life for people where quality of life is much more important the life style.