Annuities Bring Peace of Mind
Many retirees and near-retirees are looking to preserve a lifetime of hard work. In retirement, when your income is typically less than during your working years, cash flow is king. Many feel that the biggest risk in retirement is running out of money, if you feel that way, an Equity Indexed Annuity can help guarantee that you won’t.
With the market advancing and declining so rapidly, many consumers are looking for protection and security without sacrificing reasonable interest returns. However, many stockbrokers try to stand in the way of putting your investment into annuities.
Why? Once money goes into an annuity, they can’t earn commissions from trading it anymore and they may not be able to charge fees for managing it. Financial advisers have a charming term for this phenomenon — annuicide. You insure, and their revenue dies. So, many of them will try to talk you out of it.
However, in theory, I like the idea of putting a portion of one’s nest egg into an annuity that can generate guaranteed income for life — Annuities are becoming the investments of choice when the decision to park investment dollars, not needed for current expenses, has been made.
Women especially, are concerned, as they outlive men by five to ten years, yet earn 23% less, which means lower Social Security benefits. Women are using annuities to close the retirement income gap and provide peace of mind of just knowing that their investment cannot decline. This is the main reason that many are putting a portion of their retirement funds in annuity accounts.
There are two reasons or objectives why assets are moved into a fund that provides a steady stream of income One is to prevent people who are about to retire from losing large amounts of their pension savings in a stock market crash. Secondly, Equity Indexed Annuities help keep investors from buying the wrong assets at the wrong time. But the main fundamental value of these accounts is done during the rapid collapse of markets, when an equity indexed annuity will maintain its principal and interest earnings.
Early on, the knock on annuities was that once you died, the money was gone. However the policies can include riders that allow people to include a spouse in the annuity or guarantee that payouts to beneficiaries would last at least 10 or 20 years. Others worried about inflation, so now there are annuities whose payments rise a few percentage points each year or are pegged to the Consumer Price Index.
The Equity Indexed Annuity Advantage
If your goal is to create a reliable income stream that will last for life and supplement Social Security, I think this type of annuity has much to offer. First of all investors should know that most equity-indexed annuities have a fixed interest account as an additional investment option.
When interest rates are high and the stock market is in decline, the fixed account is used to credit interest to the principal of the annuity.
What makes the Equity Indexed Annuity a traditional fixed-income annuity is how interest is credited to the account. Typically, the insurance company will buy an option in a particular index like the Dow, S & P 500 or NASDAQ. After a period of time, usually one year, the option contract expires.
One of two things occur. If the market index has advanced, the option is charged and interest is credited to the annuity account. Conversely, if the market has retired, the option expires and no interest is credited to the account for that year.
In practice, the annuity either gains or maintains value each year, but investment cannot lose value due to negative market fluctuation. The greatest benefit is Peace of Mind.
