How Annuities Can Help Secure Retirement Goals
A major concern of retirees is ensuring they don’t outlive their wealth. One way to accomplish that is to consider making immediate annuities or variable annuities with a lifetime living benefit rider a part of a well-diversified retirement portfolio. Annuities are the only financial instruments available today that, like Social Security and pensions, can provide income for life and thus offer some added peace of mind.
A key threat to retirement security is longevity risk, the risk of living longer than planned and exhausting one’s assets. Defined benefit (DB) pension plans historically filled that gap, but the proportion of workers covered by DB plans has slid from 88% in 1983 to just 32% in 2010. Workers are living substantially longer than in generations past while their growing reliance on personal savings and defined contribution plans, like 401(k)s and IRAs, to fund retirement means they must increasingly bear longevity risk on their own. The risk of outliving one’s wealth is particularly acute if financial markets fare poorly.
Social Security and pensions both provide secure lifetime income, but that may not be enough. As a result, many retirees may need to secure additional sources of “guaranteed lifetime income” by themselves. By purchasing an annuity, one can effectively create a personal pension that provides the same lifetime income stream that defined benefit pension plans traditionally provided.
An immediate annuity is a financial contract that makes fixed, regular payments starting within one year of purchase. These payments can be for either a set period of time or over the lifetime of one or two individuals. In the latter case, the contract is known as a lifetime immediate annuity. These, like a pension, guarantee the owner(s) an income for life. There is no residual value upon the beneficiaries’ deaths.
A variable annuity with a living benefit rider provides a similar lifetime income guarantee, but you may not have to give up your principal. For an additional cost, most variable annuities offer optional living benefits that guarantee a minimum income regardless of how well your investments perform, even if the value falls to zero, subject to terms of the benefit. The living benefit rider may place some limitations on your investment options but a variable annuity can allow you to participate in the financial markets potentially increasing the value of your annuity and your income. Depending on the contract, you may or may not have to annuitize the value to receive the lifetime income allowing you to pass any remainder to your heirs. You should note, however, with variable annuities your contract value will fluctuate and your investment may be worth more or less than its original cost.
There are many factors to consider and many types of annuity products offered today. If you believe you would benefit from additional guaranteed lifetime income, discuss these products with a professional who can explain the differences and help you make an educated decision whether or not some type of annuity makes sense for your planning.
The Menashe Morley Group: David Menashe is a Senior Vice President and Wealth Management Advisor, and Bruce Morley is a First Vice President and Wealth Management Advisor and John Naviaux is a Financial Advisor for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation. Investment products are not FDIC insured, are not bank guaranteed, may lose value. The Menashe Morley Group can be reached at 858-381-8113.
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 Federal Reserve Survey of Consumer Finances, 2010.
Photo by Andy Templeton