Why Investors are Flocking to Fixed Annuities

Why Investors Are Flocking to Fixed Annuities

There are two primary types of annuities available to meet the needs of different investors: variable and fixed. But many investors are choosing the fixed annuity. Let’s explore why.

Variable annuities accumulate and distribute income based on the performance of the investments in which the purchaser’s money is placed. Essentially, with a variable annuity, you choose from a range of investment options called subaccounts, each of which invests in shares of a single mutual fund or, in some cases, in a fund of funds. The upside: You can make investment choices based on your individual needs. The downside: The investment return of variable annuities fluctuates, both in the accumulation phase and the payout phase. As a result, you could lose money, and that could diminish your retirement nest egg.

That’s why many investors prefer fixed annuities, which accumulate and distribute income in guaranteed amounts. Essentially, with a fixed annuity, an insurance company guarantees you a minimum interest rate on your investment during the accumulation phase. When the payout phase arrives, your payments are determined based on rates guaranteed at the time the annuity was issued. They are also guaranteed for the selected duration, such as the owner’s lifetime or a specified number of years.

As a result, fixed annuities generally involve less risk than variable annuities, because they are not affected by fluctuations in the market. Some retirees like the security of knowing that their income is predictable. If that’s the case with you, please contact us today to learn more about fixed annuities.

Planning for Retirement With an Annuity

With the oldest baby boomers turning 67 this year, retirement income planning services, which help investors turn their retirement savings into a steady income stream at retirement, are growing in popularity. However, there’s another way to achieve the same thing – with an annuity.

First, let’s look at these retirement income-planning services. When it’s time to retire, many Americans have assets in 401(k), and the challenge is turning those assets into income. To help, more than a quarter of 401(k) plans have a service that converts assets into income. With this service, a professional advises the retiree as to how best his or her assets can provide sustainable income.

As an example, consider a 65-year-old woman with $250,000 in assets who needs that money to cover her retirement expenses. A retirement income-planning service might place $200,000 in bond funds and the remaining $50,000 in stock funds. Over time, this service would gradually move the $50,000 into bonds to accommodate the retiree’s decreasing time horizon and risk tolerance. How would that strategy work out, assuming the stock market delivers average annual returns of 5.5 percent? The retiree would be able to withdraw $9,375 in income in her first year of retirement, and increase that amount by up to 3 percent in each subsequent year. Enough money should remain when the retiree is 84 to purchase a fixed annuity that will provide a comparable income for life.

The downside? These services can be costly. In many cases you’ll pay an upfront planning fee, and almost always a percentage of your assets each subsequent year. You’ll also be responsible for fees charged by the mutual fund in which you invest.

Another option is to put the money in a fixed annuity from the start. It, too, will help ensure that you don’t outlive your savings, achieving the same goal in a slightly different way.