Annuity Distribution Of Assets is an Art

Many financial advisors recommend that 20% of an individuals investment should be in bonds, yet bonds in this market is risky to say the least.  It is my belief that annuities would be a better choice for that investment. 

With Americans generally living longer, longevity risk — the chance that you’ll outlast your portfolio’s ability to support you — is rampant, with good reason: U.S. Census statistics indicate that the average 65-year-old man can look forward to nearly two more decades of life, with women likely to live even longer. All this points to the importance of investments that can withstand the long test of time.

Annuities are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year. For example, the average 401(k) fund balance dropped 31 percent to $47,500 at the end of March 2009 from $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages.

The distribution of assets is an art.  For most of us, the immediate goal is to save enough for retirement so we can have a comfortable lifestyle and not have to eat dog food. But once you’ve achieved that goal, the next task is to ensure that you don’t withdraw so much from your retirement nest egg that you end up outliving your money.

An annuity is a type of “insurance” against outliving our assets. Annuities are a widespread retirement product that guarantees a steady stream of income for a lifetime.

When it comes to retirement planning, there are three main risks to a sustainable income. Investment risk, Longevity risk, and Inflation risk.

• Stocks or mutual funds can lose money. Of course, we all understand this from watching recent financial news.
• Certificates of Deposit and savings accounts are also safe, but they have low interest rates.
• Equity Indexed Annuity -Equity indexed annuities are relatively new products to the market and offer the best of all world’s to the investor. These retirement annuities increase in value when the market rises but they don’t lose money if the market drops. Instead, they receive a fixed interest rate promised in the contract. While not all equity indexed annuities are ties to the same type of index, many use the S&P 500 as their benchmark.  The return rate will be somewhat less than the actual market return in years when the index goes up. When the market goes down though, there is a guaranteed return rate so the account does not lose money. A common guaranteed return would be 2% – 3%.

An Equity Indexed Annuity is the one tool that can accomplish three things.

Investment risk: All investors have experienced the ups and downs of market cycles, but these fluctuations can be particularly problematic in the years just before and just after retirement. The ability to generate a lifetime income from retirement can depend greatly on when you start to take income and, specifically, on the sequence of your returns. Negative returns early in retirement have more impact, and when returns eventually turn positive, it takes longer to make up the losses caused by the initial declines.

Equity Indexed Annuities, Provide investment risk protection by helping to assure a predicable level of income, regardless of market conditions.

Longevity risk: The risk of outliving your retirement savings. Thanks to advances in science and medicine, life expectancies – and the length of the average retirement – have increased by 20 years. And if both you and your spouse reach age 65, there is 52 percent chance that one of you will live to be 90. (Source: Society of Actuaries, 2006.)

As a result, without careful planning, the risk increases significantly that you may outlive your retirement savings. Income must be able to sustain lifestyle needs for much longer, while also covering health care, housing and other costs for an extended period of time.  Length of retirement… life expectancy- It’s extremely important to make sure your assets last a lifetime and if at all possible increase to provide for adjustments to the cost of living.

Equity Indexed Annuities, Eliminate longevity risk by generating a guaranteed flow of retirement income that cannot be outlived.

Inflation risk What would appear to be a statistical marvel is a financial irony, for inflation can devastate lives as readily as healthy lifestyle choices and modern medicine can sustain them. Inflation erodes the purchasing power of your income and wealth. And it doesn’t stop just because you have retired.

Of particular concern in any retirement income plan is the cost of health care, which is rising far more rapidly than the cost of living. During the past eight years, while inflation was pushing prices up by about 20 percent, the cost of health care more than doubled. 

Equity Indexed Annuities, Combat inflation by allowing you to access the upside of the equity market and lock in gains to increase potential retirement income.

In the past, it was possible to address these risks individually by combining multiple types of investment products, but it was almost impossible to effectively reduce all risks with a single investment vehicle. Today, however, new annuity designs integrate a range of features and benefits that make it possible to deal with all three risks.

To recap, An annuity is a contract between you and an insurance company, In exchange for your premium payment, the insurance company guarantees you income, starting immediately or at some time in the future.” This potential income can be a supplement to Social Security.