Annuities' Role In Your Retirement Planning
When you invest in stocks and bonds, there’s a chance you’ll make much less than you expect—and run out of money before the end of a decades-long retirement. One solution is to put part of your retirement savings into annuities, an insurance product that guarantees a certain level of income. And today’s choices avoid many drawbacks that have given annuities a bad name.
Although annuities come in myriad varieties, the basic idea is to exchange a sum of cash for an immediate or future payout. It is important to remember that this payout depends on the continued claims-paying ability of the issuing insurance company. Compare that with a traditional securities portfolio that you tap at a conservative annual rate in the hope it will last as long as you do. The yearly returns on annuities tend to be higher.
For example, according to AnnuityQuickQuote.com, a 65-year-old Indiana man who bought a $500,000 annuity could get lifetime income of $3,475 a month—an annual return of more than 8%. A product promising to continue payments for 20 years if he died before the end of that period would give him $3,035 a month, or more than a 7% yearly return. In contrast, taking 4% annually from a $500,000 stock and bond portfolio would yield just $1,667 a month.
That 20-year guarantee addresses one annuity shortcoming—that an early death could shortchange your heirs. Other kinds of death benefits are also available, as is protection against inflation. But the worst knock on annuities has been very high up-front and annual fees and punishing “surrender charges” if you want your money back. That began to change when Vanguard, TIAA-CREF, and other low-cost sellers began to offer annuities, and competition in a fast-growing annuities market has helped drive down fees.
One kind of annuity, known as longevity insurance, delays payments until age 85, and then provides a generous payout—in one case, more than $7,500 a month on a $100,000 annuity—for as long as you live. Other, related products give you the choice of taking less at an earlier date. Another option is a variable annuity with a guaranteed minimum withdrawal benefit (GMWB) that promises a specified income—say, 5% a year—but could deliver more if part of your premium, invested in mutual fund-like accounts, earns a higher return.
Combining an annuity with a traditional portfolio could increase potential retirement income without additional risk. In a recent study, securities data firm Ibbotson Associates demonstrated that substituting a variable annuity with GMWB for the cash and bond portion of a portfolio could hike the overall allocation to stocks—and thus the potential return—while the guaranteed annuity dampens risk.
We help clients craft retirement portfolios with an appropriate blend of stocks, bonds, and, in some cases, annuities. If you’d like to talk with us about your financial goals, please give us a call.
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