An Annuity is The Clear Choice

A secure retirement is a dream of everyone who worked hard for years.  Approximately one third of your live will be devoted to retirement.  Life expectancy now is close to 80.  The scenario of the possibility that you could live to be 100 is closer than you think.  That means we’ll need more money to enjoy those years.

During times of economic uncertainty or stock market corrections, people seek investments that they perceive to have little to no risk.   The stock market’s volatility scares them, but conservative investments like money-market accounts or bank certificates of deposit yield almost nothing right now. 

Out of concern that millions of Americans are not saving enough for retirement, President Obama has proposed increased tax credits for retirement savings, and he wants to require all employers to provide retirement savings plans to their employees. What’s on the table right now is the notion that workers who leave their job be given the option to invest some or all of their 401(k) money into an annuity that would provide income for life — just like a traditional defined benefit and Social Security.

Most folks invest the money in stocks, bonds, and mutual funds, none of which address the issue of longevity risk and none of which provide a guaranteed stream of income for life.  Mutual Fund Investment vehicles are designed to accumulate capital. However, you will be responsible for drawing down your assets in retirement. Once the money’s gone, it’s gone.

The problem is, is that many Americans are not suited to setting up a plan for themselves to parcel out that money in little bits. With mutual funds, you are exposed to all the risks associated to the financial markets, and there are so many funds out there these days, and choosing the right one can be quite challenging at times, you almost need a financial engineering degree to make sense of it all.

Additionally, you must consider the expense fees charged.  A mutual fund expense ratio is the ratio between what is invested and expenses that these companies take on in offering these investments to the general public. This charge is an “off the top” fee! That can be 6% or more on the high end and you will probably have annual fees as well. This means less of your money is working for you.

If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t.  One of the great benefits of a fixed annuity is that it’s guaranteed to last as long as you live. Besides pensions, annuities are practically the only vehicles available today designed to accomplish that objective.   With advances in science that appear to be extending life expectancy, this option may make sense for some people – especially if longevity is in the family history.

Obama also believes annuities should be included as investment options in company retirement plans in order to provide plan participants with the potential to receive a guaranteed income stream for life after retirement.  An annuity can guarantee you a set payout for life that doesn’t depend on how the stock market does, and it doesn’t depend on how the bond market does.  The good thing about an annuity is that there is no risk of default like a bond and pays a person till she/he ‘leaves’.  An annuity is an insurance company product but when you retire you can get an income for LIFE. You keep getting it as long as you live. You CANNOT outlive your money.

An equity index annuity is a tax-deferred annuity whose annual returns are based upon the performance of an equity market index. One can find equity index annuities in Dow Jones Industrial Average, S&P 500 and a variety of other common stock market indexes. These types of annuities are investment opportunities put on the market by insurance companies. Investors who like to play in the stock market but don’t want to risk their hard-earned money can utilize this option.

A fixed annuity still invests your deposit, but always guarantees you a set return. Your payout will be based on how much you contribute, your age, and the interest rate at the time of purchase – not the moods of the market. If you have a lower risk tolerance, this is the annuity for you. Ultimately you will need to have some of your assets in a form that you can’t outlive so you’ll eventually turn to an annuity provider.  You just need to work out how long you need to be alive to make it worthwhile to buy one.

There are people who have done very well with mutual funds or stocks. But I believe the choice is very much determined by how much time and money a person has got left. (i.e. for a retiree who has lost almost all his money in the dot-com crash or the Enron scam, or the recent economic downturn, then an annuity would probably have been the best choice).