Having enough retirement income is a top concern for many Americans nearing or in retirement. Even though they may have saved consistently throughout the working years, they may be concerned that their retirement plans will succeed. A successful retirement plan provides the ability to maintain your lifestyle for the duration of your life.
Having enough retirement income for what you need and want is essential and must be planned for, even in the best economic conditions. A way to provide income safety is by using annuities as an asset class in your retirement portfolio.
Annuities Can Provide Safety and Income - Annuities help retirees address a specific retirement planning risk- Longevity Risk. Longevity Risk is the risk that a retiree outlives their financial assets. Here are other things to know about annuities:
- Annuities can provide income for life.
- Due to their safety and growth potential, many portfolios use annuities in the financial services industry as an asset class.
- Annuities are contractual agreements with an insurance company that provide an investor with a guaranteed income stream during retirement in exchange for a premium.
- Insurance companies provide products such annuities to help individuals manage their long lives.
Annuities can offer tax-deferred growth of earnings, protection of principal, and a guaranteed lifetime income. The two types of annuities widely used in financial planning are Single Premium Immediate Annuities (SPIA) and variable annuities. Like any financial product, there are pros and cons to each type, and due diligence in investigating any annuity should take precedence before purchasing one for your retirement portfolio.
Single Premium Immediate Annuities (SPIA) - An immediate payment annuity is a contract between an individual and an insurance company that pays the owner, or annuitant, a guaranteed income starting almost immediately. It differs from a deferred annuity, which begins payments at a future date chosen by the annuity owner. An immediate payment annuity is also known as a single-premium immediate annuity (SPIA), an income annuity, or simply an immediate annuity.
- Immediate payment annuities are sold by insurance companies and can provide income to the owner almost immediately after purchase.
- Buyers can choose monthly, quarterly, or annual income.
- Payments are generally fixed for the term of the contract, but variable and inflation-adjusted annuities are also available.
Payments typically begin within a month of purchase. Annuitants can also decide how often they want to be paid, known as a "mode." A monthly mode is most common, but quarterly or annual payments are also an option.
People often buy immediate payment annuities to supplement their other retirement income, such as Social Security, for the rest of their lives. It is also possible to buy an immediate payment annuity that will provide income for a limited period of time, such as 5 or 10 years. The payments on immediate payment annuities are generally fixed for the period of the contract. However, some insurers also offer immediate variable annuities that fluctuate based on the performance of an underlying portfolio of securities, much like deferred variable annuities. Still another variation is the inflation-protected annuity, or inflation-indexed annuity, which promises to increase payments in line with future inflation.
Variable Annuities - Tax-deferred growth opportunities, but with the risk of principal loss.
- Potentially Greater Growth.
- Can provide a guaranteed income for life.
- No Principal Protection.
- Market-type returns are based on the asset class in the portfolio.
- Invests in Mutual Funds (i.e., Sub-Accounts).
- Tax-deferral benefit for non-qualified investments, not applicable to IRAs, 401(k), TSP, etc.
- Limited Investment Choices in Comparison to the Universe of Mutual Fund Choices.
Variable annuities can be expensive and come with many fees, which can affect the accumulation value. Variable annuities are market sensitive and may incur a loss to the investor. Investors need to understand this complex product prior to making a purchase decision. Working with a financial professional to know if a variable annuity is appropriate for your situation is essential.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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