3 Types of Annuities for a More Secure Retirement
The growing demand for more predictability and security when planning for retirement has led an increasing number of retirees and pre-retirees to look to using different types of annuities as way to provide more stability in their investment portfolios. Many retirees are also using annuities as a way to replace the third leg of the retirement income stool and provide guaranteed lifetime income.
Retirement planning should occur in different phases and at different stages throughout your life. Depending on what stage of life a person is in, there are a number of different annuity types that may be best suited for various situations.
1.) Adding Portfolio Stability with Fixed Indexed Annuities
Offering minimum guaranteed rates along with the potential for higher earnings based on the performance of the stock market indexes, Fixed Indexed Annuities (FIAs) have become increasingly popular in a low-interest-rate environment. With the prospect of rising interest rates, which can increase portfolio volatility, many advisors are turning to FIAs for a portion of their bond portfolio. FIAs offer protection from bond and stock market declines, while retaining the fixed-income nature of bonds. Although the upside is limited on FIAs, investors appreciate the minimum rate guarantee and the benefit of locking in and preserving their gains from volatility.
2.) Guaranteed Lifetime Income with Single Premium Immediate Annuities
Single Premium Immediate Annuities (SPIAs) have long been the vehicle of choice for investors who are seeking predictability and security. They are one of the only types of investment vehicles that can manage longevity risk and guarantee a lifetime income stream, much like a guaranteed pension (indeed, this is the vehicle that many traditional pensions are based upon). A SPIA provides a baseline for an income portfolio - a guaranteed income that is independent of both market and interest-rate volatility. When included as a part of an overall investment portfolio, a SPIA provides the foundation of a solid income strategy upon which a range of investments can be layered to create capital growth and increasing income in retirement.
Some advisors suggest that it is better to wait until interest rates increase and/or for investors wait until they’re older because they could lock in a higher lifetime monthly payment. And some advisors suggest employing a laddering strategy, which involves purchasing SPIAs at different stages of retirement to capture higher interest rates and a higher payout rate based on the investor’s increasing age.
3.) Maximizing Future Income with Deferred Income Annuities
Deferred Income Annuities (DIAs) are a more recent type of annuity that is capturing the attention of advisors and investors who want to maximize future income while protecting against extended longevity. DIAs can be especially effective for investors who have no need for an immediate income stream, but they anticipate a bigger need for income in the future. It is sometimes referred to as longevity insurance because it can be set up to turn on an income stream at a much later age. DIAs are generally purchased with a lump-sum payment at an earlier age.
Using current interest rates and actuarial assumptions, the amount of the future payout can be substantially higher because the insurance company assumes a shorter period for monthly payouts. The advantage of a DIA over an SPIA is that the same amount of monthly payout can be purchased with less capital because of the time that passes between the purchase and the payout. If an investor dies before receiving any of the payout, a cash-refund, if purchased as an option, is paid to the DIA beneficiary.
Annuities are not a cure-all for all of the challenges facing retirees today and they are definitely not a one-size-fits-all solution. However, when properly understood and considered in the context of a well-conceived retirement plan, their unique properties can help retirees achieve financial security like no other financial instrument.
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*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2021 Advisor Websites.