Annuities As Supplementary Income

Many people start a project by defining success, but few think about what should happen if it’s not successful, or has run its course after a period of time. What if funding runs out? The thought of retirement can scare the daylights out of many people, especially when they realize that by the time they stop working they will likely be in financial trouble. 

U.S. life expectancy reached nearly 78 years in 2007, more than half of babies born in rich nations today will live to 100 years if current life expectancy trends continue. That means your retirement savings and income will need to last 30 or 40 years after you leave work.

After last year’s stock market downturn, many retirees with overly aggressive portfolios are now finding they may never fully recoup.  For many it is to late to fix their financial situation and are starting to see why many of our grandparents who lived through the Great Depression became extremely tight fisted with their money.

We believe everyone can retire, no matter what you make today.  All you need is the right plan. Your plan. And the determination to stick to it.  The approach we recommend is to figure out your basic expenses—utilities, food, taxes, insurance and so on. Then purchase a guaranteed product that will cover those costs and provide an Income that will Last a Lifetime and being able to cover what Medicare and Social Security does not cover.

The problem is what product make sense in today’s world, for example yields on money markets last week were averaging less than 1 percent. There is a reason why a Fixed Annuity is the most popular and reliable source of supplementary income.  Recognizing that the returns may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns, however the nice thing about a fixed annuity is its there as long as you are.

There are many investments you can make out there that are only good for so many years and if you outlive them you take the loss. If you want a steady stream of payments when you retire then a fixed annuity is an excellent option.  Then you can invest the rest of your savings in more aggressive investment products. Additionally, Equity Index Annuities are insured by the State Guarantee Fund which is similar to the insurance provided by the FDIC. The guarantees in the contract are backed by the relative strength of the insurer.

Diversifying your investment portfolio is just one pointer that advisers recommend to ensure that you don’t outlive your savings.  However, despite the need to diversify your portfolio, you should limit your exposure to aggressive investments. An Indexed Annuity provides diversification as these annuities earn interest that is linked to a stock or other equity index.  One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity’s value. Most fixed annuities only credit interest calculated at a rate set in the contract. Equity-indexed is a fixed annuity that credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

Your equity-indexed annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.  For example, many single premium annuity contracts guarantee the minimum value will never be less than 90 percent (100 percent in some contracts) of the premium paid, plus at least 3% in annual interest (less any partial withdrawals). The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases.

Here’s how indexed annuities work. The products are designed to mirror, to varying degrees, a well-known index, such as the S&P 500. The products have floors, to ensure that the purchaser will never lose money on the investment – some even have a minimum return. But they also have a ceiling that will cap the potential gains a purchaser can realize. In effect, they straddle the line between insurance and securities products.

Fixed index annuity sales continue to climb, according to data just released by the Insured Retirement Institute (IRI) and Beacon Research. Fourth quarter sales totaled $7.6 billion, representing a 3.2% increase over the previous quarter, IRI and Beacon found, with total fixed index annuity sales for 2009 at $30.2 billion, posting a year-to-year increase of $3.5 billion. Total fixed annuity sales were $105.1 billion in 2009, the groups say, just 2% less than the record high in 2008.

The main difference between bank CDs and fixed annuities are that towards the end of the guarantee the annuity enables the investor to pocket a certain contractual minimum which is absent in the case of CDs.  Fixed annuities have good rates, almost always more than bank CDs in terms of percentages. Thus these annuities with their guaranteed rates are by far a better option in this era of constant decline in interest rates.

Fixed annuities also have a specific length of time you must hold them or pay a penalty, just like a CD. In the case of the fixed annuity, that time is the surrender period. Unlike a bank CD, once you pass the time in the surrender period, the annuity doesn’t roll over and begin a new surrender time. If you miss the surrender period or don’t cash in the annuity at that time, you can do it at any date after the end of the surrender period and never receive a penalty. CDs roll over and start a penalty period. Often missing the window of opportunity can cause hundreds of dollars in fees to the bank.

Taxation of the growth is also an important factor. Those preparing for retirement find that much of the growth on their CD goes to taxes, regardless of whether they roll it into the next CD or take the funds. People with fixed annuities don’t face this dilemma.

The settlement options in the policy mirrors an immediate annuity in that your lump sum can provide regular payments from an insurer for the rest of your life.  No wonder annuities are being hailed by everybody from financial planners to President Barack Obama as a way for Americans to stretch their retirement nest eggs