Annuities Can Play a Role in a Well-Planned Retirement

Save and Generate Income with Annuities

Recently, the Insured Retirement Institute (IRI) asked baby boomers (individuals born between 1946 and 1964) what trait they most value in an investment product. The answer? Guaranteed income each month (with rate of return coming in second). Interestingly, other than your pension and Social Security benefits, no currently available investment vehicle-besides an annuity-can guarantee lifetime income during retirement.

Annuities offer the best of both worlds: Through annuities, you save and generate income. The lump sum you give the insurance company now (or payments you make over time) will grow, and from this you’ll receive a monthly income at some point; whether sooner or later-it’s your choice.

Since the financial crisis, market volatility has been high and interest rates have been low. As a result, many people are wary of investing. According to the Allianz Life 2014 Market Perceptions Study, four in 10 investors cited “fear of market uncertainty” as a concern that prevents them from investing now for retirement. On the other hand, many said they would put any extra cash they had to invest into a product that offers a balance of growth and protection. In other words, annuities.

Young investors look for guaranteed income, too: As for income, an IRI/Cogent Research study showed that 40% of consumers are extremely or very likely to give up control of some or all investment principal in exchange for guaranteed income payments for life. And that’s true among young investors (ages 25 to 44) as well; half of the study subjects in this age group were willing to give up control of principal for guaranteed income.

Plus, people are happy with annuities, if the IRI/Cogent Research study is any indication. It showed that 73% of annuity owners see annuities as a critical part of their overall retirement strategy, and 45% are extremely or very satisfied with their annuities.

Annuities Can Play a Role in a Well-Planned Retirement

Annuities may sound complicated to many investors, but they can play an important role in a comprehensive retirement plan.

As retirees age, they dramatically increase their risk of running out of money. Many struggle to figure out how to withdraw enough money from their investment portfolios to live comfortably without depleting the principal should they live longer. But allocating a portion of your retirement investment portfolio to an annuity reduces this risk.

As you may know, an annuity is a contract with an insurance company. You give an insurance company a lump sum of money now, or make payments over time. In exchange, the insurance company pays you a monthly stream of income starting now (in the case of an immediate annuity) or at some point in the future (in the case of a deferred annuity).

Note that the insurance company, in determining the annuity payment, factors in the likelihood that some annuity holders will not live as long as other annuity holders. This so-called “risk pooling” allows the insurance company to make annuity payments that are larger than would be possible through a systematic withdrawal plan from your own investment portfolio.

As a result, annuities have two potential benefits: They can reduce your risk of running out of money in retirement, and they can increase the amount of your income stream. Indeed, with the exception of Social Security and pension plans, annuities are the only financial instruments available today that can guarantee you a lifetime stream of income during retirement.

September 18th, 2015 by Lightship Insurance