Retirement times are changing, and gone are the days when workers could rely on steady pensions to take them through their aging years.
Indeed, fewer people are retiring with the promise of a pension, or regular payment made during a person’s retirement from an investment fund to which that person or his or her employer has contributed during their working life.
For the relaxed retirement you want, an annuity might be useful.
“The stock market has soared more than 75% in the past five years, yet many pension funds, where many middle-class workers should benefit from the market’s rise, continue to struggle, jeopardizing benefits for the workers who were counting on them in retirement.,” explains The Washington Post in a recent article, adding that cities including Chicago and San Jose have already moved to cut benefits for new or current employees to save costs.
Find the annuity that is right for you
Those without pensions should consider annuities for part of their retirement savings to create their own pensions, or income for life, financial experts advise.
An annuity, or insurance product that pays out income, allows you to make an investment in the annuity and then receive payments from it at a later date — giving you a dependable income stream during retirement.
“Annuity has been a dirty word and earned a bad rap,” says certified financial planner Rose Swanger, an investment advisor representative at Royal Alliance Associates, about some of the misconceptions about annuities. “However, an annuity is just one of many tools that can be used for investors and retirees. Depending on the individual’s needs and unique situation, there is a different flavor of annuity for everyone.” Swanger is based in Knoxville, Tenn.
Indeed, there are many different types of annuities. The two main types of annuities are fixed and variable.
Fixed: Fixed annuities guarantee a certain base of income per month. The amount of income you receive every month from a fixed annuity is exactly the same no matter what.
Variable: The amount of income you receive from a variable annuity can depend on underlying investments. So if the investments behind the annuity are doing well one month, you would receive more money that month than you would when the investments behind the annuity are doing poorly.
Variable annuities are more widely held than fixed annuities (75% vs. 25%), according to the 2013 Gallup Survey of Owners of Individual Annuity Contracts.
Because variable annuities allow you to receive periodic payments, offer a cash refund, and are tax-deferred, it has become a popular product, according to the U.S. Securities and Exchange Commission (SEC).
“A ‘cash refund’ is the non-morbid way annuity providers refer to a death benefit,” explains USA Today in a recent article. “Under this option, your heirs are guaranteed some or all of your remaining payouts at your passing. Of course, the death benefit to your heirs means you get smaller annual payouts during your lifetime. An annuity for life is simply that — one that pays out until you die, and no longer.”
In addition, your annuity can be immediate or deferred.
“An immediate annuity starts paying you right away after you make a one-time, lump-sum payment,” USA Today explains. “In contrast, a deferred annuity involves you paying in, but then waiting a predetermined period of time to receive any payouts. Deferred plans pay more when they do pay out, however, to offset the risk that you may die before collecting any benefits.”
Get the most bang for your buck
Annuities address a common concern many people have about outliving their retirement funds by providing a dependable stream of income, making the product increasingly popular, notes USA Today. U.S. annuity sales reached nearly $230 billion ($229.4 billion) in 2014, according to the Insured Retirement Institute.
For example, a New York Life policyholder who purchased an annuity in the 1980s is still collecting. In fact, her initial investment of $100,000 has grown to more than $800,000.
Consider these factors before making an annuity purchase
But there are limitations that apply to an annuity.
“For starters, annuities are not liquid,” USA Today says. “Once your money is in, typically the only way to get it back is slowly through benefit checks.”
Many people also assume annuities are too complicated, but working with the right advisor can help make sure you are choosing the product that is in your best interest. Using an annuity calculator can also help familiarize you with how these products work.
You might also consider working with a financial advisor. “The basic idea of an annuity is not so confusing, but the options you have for tailoring the annuity to your specific needs can begin to get complicated,” says Kerry Soudan, a financial advisor with TREW Financial & Benefits Group, Inc., with sites nationwide, including the Chicagoland area. “Working with someone who understands this product inside and out should make the process relatively straightforward.”
