Annuities can bring more stability and certainty to a retirement portfolio. But how do you know you are getting a good deal for your money?
The biggest advantage that annuities can give for your retirement is their guarantees. Or in other words, the contractual assurances that the contract-issuing insurance company promises to provide you.
For your retirement, you might already have a number of financial guarantees that will contribute to your retirement security.
You paid into the coffers of Social Security during your career. In exchange, Uncle Sam guarantees you will receive a monthly paycheck from the SSA once you begin your benefits.
If you buy Treasury securities, you are guaranteed a return of your initial principal once the bonds mature. The bonds also pay you guaranteed semiannual interest payments during the maturity period. You also have these same guarantees when you hold a CD from the bank.
Many Things in Retirement Aren't Guaranteed
Of course, other parts of retirement don't come with guarantees.
You aren't guaranteed for your money to grow when investing, although most likely your money will grow over the long run. Historical market data shows and suggests this.
However, you can lose money, and even your principal, during periods of market losses. This can be a bigger hit especially if you are the cusp of retirement and ready to start taking income from your portfolio.
When financial uncertainty arises, experts acknowledge that fortifying your portfolio with the guarantees and actuarial precision of annuities can benefit you in more ways than one.
Why Annuities for Guarantees in Retirement?
Mainly, because the life insurance companies supporting those annuities are so well-capitalized.
Under state insurance law, life insurers must maintain, at minimum, dollar-for-dollar reserves for every annuity premium dollar they bring in.
In other words, 100% of annuity premiums are covered by a legal reserve system maintained by the life insurer. The insurer must keep this up dollar-for-dollar in capital reserves.
Many life insurers go above and beyond this call of duty, holding a dollar-and-some-cents in reserve capital for every dollar of annuity premium.
What Guarantees Can an Annuity Add to Your Retirement?
Here are a few guarantees that annuities provide and how they can help strengthen your financial security in your golden years:
1. Guaranteed Lifetime Income
Annuities are the only instrument on the planet capable of really paying you a guaranteed income for life.
You can choose a payout option that will continue for the rest of your life, even if you deplete the entire contract value before you die. You can also choose a joint life option or joint and survivor option if you are married.
2. Guaranteed Growth
You can get a guaranteed interest rate, whether for a year or for many years in a period. This means guaranteed growth potential.
It applies primarily to fixed annuities. But fixed annuities almost always pay higher rates than other guaranteed instruments such as CDs and Treasury securities.
Many fixed annuities will also pay a higher "teaser" rate during the first year in order to attract new contract owners.
The interest rate that is paid will reset once the contract matures, that is, once the back-end surrender charge schedule has expired.
3. Guaranteed Protection of Principal
Fixed-type annuities are never an investment in the market. They are insurance contracts. If you have money in a fixed or fixed index annuity contract and markets decline, your money won't lose value due to the drop.
For managing their risks with these contracts, insurance companies have underlying investments of conservative low-risk profile. There is a strong record of them holding up even in hard-hitting markets and economic times.
This has become more relevant for investors than ever before since the outbreak of the Covid-19 pandemic, which effectively disrupted financial markets and the economy.
4. Guaranteed Wealth Transfer via Death Benefit to Heirs
This assumes that a wealth-transfer situation meets the conditions for this.
If you haven't been paid all the money in the contract, the remaining accumulation value will go to your designated beneficiary. The beneficiary, for example, may be your spouse or your kids.
Some annuities have death benefit-enhancing riders that can pay you more than this; it's an add-on that you can opt for in many contracts.
5. Guaranteed Protection for Qualifying Care
In certain qualifying situations, you might receive enhanced income from an annuity. What sorts of situations might those be? Generally for long-term care needs.
Confined nursing-home care is a common one. A variety of contracts allow for this benefit even with some home healthcare. For many annuity contracts, the care situation might qualify as long as 2 of 6 acts of daily living can't be satisfied.
Keep in mind that this benefit tends to last for a certain period, such as five years. Be sure to check your annuity contract for specific details.
This kind of protection against long-term care costs can also be much more forgiving from an underwriting standpoint. Many of these kinds of annuities will double or triple their standard monthly payout until either a certain timespan has passed (5 years in many contracts) or the balance of the annuity is exhausted.
If the balance is depleted and the annuitant is still living, then the contract will revert back to its original, standard monthly payment. Be sure to check your annuity contract for specific details.
6. Guaranteed Tax Advantages
Not only that, annuities can offer tax-advantaged treatment for your money.
This option can be for after-tax money that you are looking to defer taxes on growth money. What if you are looking to start an annuity contract with pre-tax money from an IRA account or qualified retirement plan? Then a properly done transfer to the annuity will let your money keep its tax-deferred status.
One chief advantage of annuities is the fact that there is no contribution limit for non-qualified purchases.
If you so choose, you could even put a few million dollars into an annuity at one time. Of course, some carriers have in-house limits on how much you can contribute. But premium payments to non-qualified annuities are always non-deductible.
How Can Annuity Guarantees Help You Overall?
A recent article from the Retirement Income Journal discusses how annuity guarantees might help retirees overall.
One expert, Francois Gadenne of The Curve Triangle & Rectangle Institute, talks about annuities in the context of a "Safety-First" retirement strategy. He mentions how they might offer more certainty than other types of strategies might provide:
"Revelatory moments break generalizations about generations. Boomer retirement plans become at least more clearly dichotomized: Probability-based plans vs. Safety-first plans. The former seemed wiser before. The latter seems wiser now."
"The uncertain wisdom of the choice of plan remains. Is this revelatory moment a reset of future business growth, such that prices cannot swing back the other way, and fast? Selling breaks the uncertainty by realizing the loss. Do you have a sense of who is selling and why? How many have their Household Balance Sheet assets matched or mismatched to the duration of their liabilities?"
Planning for Your Retirement Peace of Mind
By bolstering your retirement strategy with annuities and their guarantees, you can enjoy more peace of mind. They are just one part of a well-thought-out plan of various instruments and investments working in tandem, all toward your goals.
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