De-Risking Investments With Annuities

There is no problem with the approach of building one’s own investment nest. We all know that there is a growing need in this country to take our retirements into our own hands if we want the funds necessary to have any quality of life upon retirement.

Personal pension plans (annuities) are among the most highly recommended investment options for you to stay happy and comfortable even during your days of retirement.  The personal pensions are for anyone and everyone who dreams of a financially hassle free life in the twilight years of their life when they will not be in a position to earn much.   

Annuities are precisely the instruments that help you transform the value of your investments into a periodic source of income. You also have an option to choose a plan that offers lifelong income or even a plan that provides you income for certain period of time.

Annuities, particularly fixed or indexed annuities, are a good way for people to go when looking for a conservative option to put money away to sit and grow particularly for folks planning on using this for retirement living.  The problem is that money is such a limited commodity in this world, we are living longer than ever before, and we are enjoying much more mobility in our golden years than in times long past

In the world of life-expectancy statistics, there’s a motto:  The longer you live, the longer you’re likely to live.  Many retirees misread the statistics for life expectancy.  Often, they focus on the life expectancy at birth, which for a man born in 1945 was about 72 years and for a woman, 77 years, according from data from the Social Security Administration.

But the averages are depressed by those who die retatively young.  Today, for a 65 year old couple, there’s a 50% chance that at least one spouse will live past age 92.  For a 70 year old couple, there’s a 50% chance that at least one spouse will live past age 93.  For a 70-year-old single man, odds are in favor of living past age 87 and a for a woman, past age 89.

Retirees have a tendency to overestimate the returns they can earn on their investments, especially once they start withdrawing money from their portfolio.  When approaching your retirement you may find that there’s no one-shoe-fits all answer to where and/or in what you should invest your money.

Many people who have taken their lump sums from their 401k’s or IRA’s didn’t manage it wisely.  Some weren’t prepared to receive large amounts of money. They got overwhelmed with the delusion of wealth and became careless and lost their retirement funds.  What a predictment to find yourself in after you retire.  What are the options?

For those retirees looking for exposure in equities, your retirement portfolio may be comprised of direct investment in stocks, mutual funds or equity indexed annuity plans:

• Leveraging the capital markets alone for building a retirement corpus is not advised as capital markets are subject to high volatility.  It is recommended to De-risk your portfolio from the volatility of the market by reversing the asset allocation you had in the initial years of savings.   One should slowly shift funds from riskier assets towards less-volatile assets is the goal of most retirees. .
• With Mutual Funds the liquid nature of these investment instruments could prove a deterrent to long-term planning as there might be a tendency to use the corpus for other life-stage needs, compromising retirement planning and lifestyle.
• Fixed annuities help you keep away from adversities of fluctuations of stock market rate;  Equity indexed annuities are good for those that want to keep up with inflation but still require safety. One of the main reasons for purchasing a life annuity is to receive a monthly income for life without the risk of losing money on investments.  

Most people use equity indexed annuities as a deferred contract, but you can use an equity indexed annuity as an immediate annuity also. The difference between the two is the time when you take payment. On a deferred contract, you expect a payout later, or never in some cases and the funds go to a beneficiary. In an immediate annuity, you begin a stream of income right away. An immediate annuity is excellent for someone that wants payments for the rest of their life, no matter how long they survive.

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.

There is a price for the investor to pay when they use this type of retirement annuity . Since the company takes all the risk, they also get some of the reward when the market rises. Often contracts vary in the amount of the market growth that the company gives to the owner of the annuity. These are the annuity’s participation rates. Some companies offer as high as ninety percent of the growth while others offer as little as fifty percent.

However, if you think that the ninety percent is always the best deal, think again. Often the contracts with the lowest percentage of market participation make up for the difference by offering a higher guaranteed interest rate. If your contract runs during periods of extended down markets, the lower participation rate may actually pay higher because of the number of years the product used the fixed rate to calculate the return.

A central issue with annuities is the way they are paid out. If you purchase, for example, a $100,000 annuity, that’s how much you pay. No additional fees or commissions are charged.  The monthly benefit you then receive is computed on a combination of factors, including your life expectancy, how big the purchase was and the interest rate index that determines the benefit amount. There is no middleman between you and the annuity provider.

The annuity pays you a portion of your own money every month which is partially tax free in that your basis is non-taxable. If you live long enough, you will receive more than you paid in. If you die early, you “lose,” in a sense — although you would have had the peace of mind of receiving a monthly check throughout your lifetime.  However, to address this issue, most take a period certain payout, 10 or 15 years are normal.

Annuities are ideal programs that may help you to accumulate money on tax-deferred basis. Personal annuity pensions are considered as a significant source of financial help for retired individuals as it provides a steady source of income after the event of retirement.  The first and foremost benefit is that it offers guaranteed income for a lifetime after retirement of the investor on low risk basis.