Now that the Powerball winner has come forward to claim her prize of $758 million (before taxes), you can’t turn on the television or radio without hearing the word “annuity.” The winner of the lottery had a very important choice to make: to take an after-tax lump sum or pay the taxes and receive income for life. This got me thinking about the number of people who don’t understand exactly what an annuity is and how it can be beneficial when used in the following situations:
- The stock market makes you nervous. We are having the third-longest stock market upswing in U.S. history. The S&P 500 has nearly tripled since its low point on March 9, 2009. In fact, it is up 194% since then. In January 2016, we saw the bull-market run slow down quite a bit. Now we have renewed concerns over whether President Trump can move his proposed tax cuts forward and the mounting threat of potential issues with North Korea, to name but a couple. Equity-based investments fluctuate in value depending on how the equity markets are performing. When the market is going up, we are happy. But when it heads south, it’s painful to watch our account values go down. 2008 and 2009 are painful reminders of what can happen when the market performs poorly.
A safe alternative to equity markets is annuities. An annuity can protect your principal value, ensuring your principal remains intact, even in a down market. Many who are nearing Retirement do not want to risk their principal at such a crucial stage in the game. Equity markets are an unsettling place to be in when nearing Retirement, especially with a market that seems like it will soon correct itself. Many retirees have worked a lifetime to save for Retirement, and a loss of 10-30% of their funds would be a catastrophic blow for their future. Retirement would look a lot different if this happened. One could be forced to work longer than anticipated, or Retirement funds would have to work that much harder to earn the interest needed to provide you with the income needed to retire, therefore requiring you to make riskier investments at a time when you should be looking at conservative positions. So if the markets make you nervous as you are approaching Retirement, an annuity is something to consider for a portion of your assets.
- You seek predictable returns and safety. Fixed annuities can offer guaranteed minimum returns. Some annuities will also allow you to participate in an index, such as the S&P 500. Your return is tied to the performance of a particular index and offers a participation rate or cap on return. Simply put, in the following example, if the index goes up 10%, you would earn 7.5%. This is a 75% participation rate. You participate in 75% of the gain. The tradeoff of the cap is that, in the event the index goes down, you might earn nothing, but you don’t lose anything, either. You are taking part in a portion of the upside, but not the downside. Some annuities offer a minimum return and then stack on the returns of the index to that minimum, giving you an even higher return. In short, if you still want to participate in market-type returns without risking your principal, a fixed index annuity may be suitable for a portion of your assets.
- You want guaranteed income for life. Along with such great features as safety of principal, market-like returns, and predictable earnings, many fixed annuities also offer a feature called an income rider. This rider can be added for a cost of approximately .85% to 1%, depending on the company, and is designed to give you a lifetime income stream. If you’re like most Americans, you don’t have a pension, like firefighters, police officers, teachers, and town/state employees do, but you’re looking for a way to generate that same kind of income. The days of the three-legged stool no longer exist. Years ago, many retirees could count on Social Security, a pension from their employer, and their own savings to deliver the necessary income during Retirement years. Today, most employers only offer 401(k)s rather than pension plans. These income riders can provide a guaranteed income for the life of the individual and their spouse if they choose the joint income payment. The income rider will act as your own personal pension. It will roll up at a rate of 4–6% each year, depending on the companies used, and, in some cases, those are minimums. The income rider is a value that will grow over time and is predictable and guaranteed. Each year that you choose not to turn on the rider, the lifetime income amount will increase in value. Therefore, your guaranteed income will increase each year (very similar to Social Security). This takes the guesswork out of how much income you will be able to take from your savings and investments and how much you can count on in any particular year. In traditional investments, it is difficult to gauge how much income you can take from your savings each year because equity investments fluctuate in value. When the market goes down, and the value of your portfolio declines with it, you then have to withdraw funds to live, which compounds the problem. Carving out a portion of money to provide guaranteed lifetime income is something to consider when looking at an annuity.
- Nursing home and long-term care expenses concern you. The high cost of nursing home and long-term care insurance is one of the top three concerns of every retiree we see. A nursing home in the greater Boston area can cost up to $14,000 a month. Long-term care insurance is costly and can be upwards of $5,000–$6,000 per year in premiums. Some individuals who can afford it and want long-term care insurance are uninsurable due to a preexisting illness or sickness. How do they solve this issue? Many people are forced to roll the dice and cross their fingers that they never need nursing or home care. In this case, if an extended stay is necessary, it will quickly wipe out a lifetime’s worth of savings. Many annuity companies that offer the lifetime income rider also include an additional enhanced benefit that provides for more income provided an individual is ill and unable to perform two out of the six activities of daily living. For example, if someone is receiving $30,000 per year from their income rider and meets the qualifications for the enhanced benefit, their income would increase to $45,000. This additional income could help with at-home care or provide more income that could be used towards a nursing home bill. This feature is another reason why an annuity is something to consider for Retirement planning. You never know what can happen.
If you identify with these four concerns, do yourself a favor and contact a financial professional who can help you on the road to worry-free Retirement!
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by us.