Social Security Embellishment With Annuities

Many folks who were inclined to pooh-pooh annuities during the bull market a few years back have reconsidered their position thanks to the market crash. It’s true that many stocks have regained lost ground since the market bottomed in early 2009, but the tremendous volatility in recent years has caused many retirement-minded investors to rethink their risk tolerance. 

Among the many risks retirees face is living too long and outliving their money. The average retirement lasts 30 years or more.  There is a solution in longevity insurance, better known as annuities or life annuities.

In recent years, prospects for retirement have seemed ever more frightening. Those who are close to retirement and have substantial assets set aside have seen their value plummet in the market’s meltdown.

Although the rally has restored some of those portfolios closer to full strength, the latest correction has everyone back on their toes again.

Baby Boomers weaned on stocks may view annuities as ultraconservative, but as they move from capital accumulation to drawing retirement incomes, they may want to rethink theses products.

A recent poll revealed that more than 81% of U.S. consumers in the annuity market wanted a lifetime guarantee of income and as the popularity of living benefit guarantees grows, we will likely continue to see consumers turning back to the only investment vehicle available that offers a protected income stream for life just like Social Security.

Here’s the good side of income annuities: In exchange for a sizable chunk of your money, they’ll provide you with an income — for life. This is attractive because we don’t know how long we’ll live. You might have a solid portfolio upon retiring at age 65, but what if you end up living to age 105? Will it be able to support you for 40 years, instead of the 20 or so years you might more reasonably be expected to live.

If you’re investing mainly in stocks, you simply don’t know how well they’ll do in the future. Your future nest egg is far from certain. With income annuities, your income might well be lower than what you’d be able to withdraw from your stock/bond portfolio, but at least it will be guaranteed to last your whole life. Just a pile of cash parked in a good plan.

Should you rush out and put all your eggs in this basket? I don’t think so. But it might make sense, to put a portion of your nest egg in one — or more. The humble retirement annuity is what gives you that fallback position.  Something that gives you a reasonable basic income through your golden years.

When properly understood and used, annuities can be a great addition to a retirement plan. In many respects, Social Security payments are like an annuity.  Individuals in retirement who are receiving the bulk of their income from stable, guaranteed sources are actually much happier,  As they age, those without Defined Benefit pensions (Annuities) get increasingly anxious about outliving their savings.

There is a type of fixed annuity known as an indexed equity annuity. It provides you performance guarantees that are linked to the gains in a common index, such as the S&P 500 index of stocks. You would be able to enjoy some of the upside of having your funds invested in the stock market but you wouldn’t need to actively manage these investments.

With the recent disruption market and uncertainty, equity indexed annuities can be a good option for someone nervous about having their retirement savings are exposed to market volatility values. “It’s a common misconception — that in order to have enough money to get through the rest of your life, you want a withdrawal rate of no more than 4% of your investment account(s), you can run out of money, with an annuity that can be a larger income benefit.”

Individuals who are long term savers and who have a low tolerance for risk when it comes to the loss of principle and are more comfortable with a constant rate of return on their investment are strong candidates to an index annuity.

If you are looking for possible rates of return higher than a savings account or certificate and has the “no loss” protection principles that an equity indexed annuity provides. Equity indexed annuities also have the advantage of tax deferral of earnings that make it a retirement savings vehicle large. Keep in mind, an annuity can only be a piece of your retirement plan’s overall portfolio. 

Pay Out Options

An insured may choose to receive he/she annuitization payout in one lump sum.

Straight life pays the insured an income guaranteed for the rest of his life. No refund of the principal is paid out if the insured does not live to receive it all.

Installment certain provides an income until the insured dies. If he dies before the end of a stipulated time period, his beneficiary would receive payments for the rest of the stipulated time.

Joint and last survivor life income pays two or more insured’s until the last one dies.

Joint and survivor life income with installment certain provides an income for two insured’s until both die. If both die before a stipulated time period, their beneficiaries will receive payment for the remainder of the time.

Fixed Indexed Annuities with an income rider are a great way to invest now, through a lump sum payment, for retirement later.  Think of your money as a pension fund with flexibility that is one of the most important parts of planning your “financial roadmap.