Believe it or not, different financial strategies can be in style or out. But unlike the arbitrary whims of fashion, financial trends usually have very logical reasons for being popular.
Annuities are a fad… But a fad that makes financial sense.
Annuities are not new players in the retirement planning game. They are an insurance product that many have used successfully to guarantee income in retirement.
However, annuities are proving to be the new “in thing” for retirees.
“With more products and unique solutions available to retirees than ever before, the climate for annuities proves friendlier, as they provide security at a low cost and ensure income as long as they live,” said Bryan Slovan, founder and CEO of Stuart Financial Group, a boutique financial planning firm exclusively serving retirees and soon-to-be retirees in the Washington, D.C. metro area.
Annuities aren’t for everyone, to be sure, but there are three reasons in particular why the time is right for annuities.
1 Low Interest Rates
The Federal Reserve recently opted to hold interest rates steady at zero to 0.25%, and the annuity interest rate for September 2015 remained low at 2.38%, according to the Federal Retirement Thrift Investment Board. Given that, purchasing an annuity now has proven more attractive in recent months than it has since rates were at their lowest in February 2013.
“Some annuities allow for principal protection while allowing a client to make some interest based on specific market indexes,” Slovan said. “If things go well, they make a decent return. If they don’t, the client does not lose a dime.”
Volatile Investment Marketplace
The U.S. stock market by nature isn’t stagnant, and if recent turbulence in the investment marketplace resulting from fears about China’s economic slowdown is any indication, it’s that investing isn’t for the faint of heart.
Relying entirely on an investment portfolio as an income source in retirement can be dangerous since the market tends to fluctuate, says Joeseph Alfonso, a fee-only financial advisor at Aegis Financial Advisory in Lake Oswego, Oregon.
“If a retiree is pulling on that volatile source of income, if they’re unlucky and the value of their portfolio goes down, then each year when they tap that portfolio, they’re taking a greater and greater value from it, making their income relatively flat,” Alfonso says. “If that happens too long, their assets can spin down until they can’t recover, so far that their portfolio won’t grow enough to sustain them.”
And while investments shouldn’t be entirely ruled out and volatility isn’t all bad, they shouldn’t be the end-all to your retirement income. That’s where annuities come in, as they help to avoid some of the risks associated with a volatile market, Alfonso says.
“Having different sources of retirement income is very important, and annuities provide predictability,” he says.
Increased Life Expectancy
As opposed to life insurance, which protects against dying too soon, annuities are sometimes considered insurance against living too long. Since they’re geared toward those who want a guaranteed stream of income for an extended period of time, they’re well-suited for today’s retiree who faces an increased life expectancy.
And as insurance companies consider people living longer, they’ll also weigh annuity payouts, meaning it’s better to act sooner than later.
“With the new life expectancy tables just released, insurance companies will be offering a lower payout in the very near future,” Slovan said. “It is a good time to lock in a higher payout.”
