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Annuities Provide Income Certainty


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Retirement planning has changed a lot over the last few decades.  Pension plans became very costly for businesses. So, the private sector has largely transitioned to 401(k) plans for its workers instead — which has resulted in plenty of new challenges, including the need for Americans to take charge of their investments as well as the rate of their retirement savings.

The power of compound returns is a basic tenet of investing, but it’s still shocking to see how it works especially with the extremely low interest rates offered at this time. The problem with the current interest rates is that it’s unfair that people who’ve saved every penny, paid off mortgages, and everything they were supposed to do and they were going to retire with their beautiful nest egg and now they’re getting one-eighth of 1%.

What makes resistance to the stock market is that seniors who bought at a certain level – only to see the market fall from there.  Investors need to consider the sequence of returns in retirement, because if their portfolio is all invested in equities and they take money out of their portfolio while the market is down that can rapidly accelerate the depletion of their assets.

Standard retirement investing advice has you invest heavily in stocks early in your career and then slowly adopt a more conservative strategy going forward. One simple rule involves taking your age and subtracting it from 100, and that gives you the percentage of your portfolio you should invest in stocks.

Longevity risk is a growing concern for today’s workers and retirees…many Americans are facing the likelihood of outliving their resources. Increased longevity has had a profound impact on how one must plan for retirement.  Nevertheless, many are not financially prepared for these extra years of life.

One of the big reasons retirees may end up spending more than they thought they would is because of how much they unexpectedly have to spend on health care — that’s up nearly 30% over the past decade — on health care throughout retirement, even though they have Medicare health coverage.

For those who don’t have the backstop of a traditional defined-benefit pension plan, however, annuities could be an attractive way to re-create the kind of guaranteed retirement income most Americans enjoyed in decades past.  Annuities make it so you can still have a pension.  The basic feature of an annuity that makes it attractive to savers is the promise of a guaranteed income stream for the rest of their lives.

That kind of certainty is hard to replicate with other investments, which can fluctuate in value or income potential over time.  In its purest form, an annuity is taking a portion of my assets and turning it into a lifetime income stream   That’s an incredibly appealing idea to people who don’t have the guarantee of a pension plan.

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Thursday, April 21st, 2016 Wealth Management

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