Fixed Income Annuity: Solve 3 Big Problems with 1 Investment

Fixed income annuities can have many key benefits for retirees.  Of all the challenges we face in preparing financially for retirement — creating a steady income stream, gaining tax leverage, and reducing risk of losing money — are at the top of the list.And, the promise of fixed income annuities – an investment tool that some financial experts call a real game changer for the nation’s retirement market — is that it solves all three of the above problems and maybe even more.

fixed income annuityFixed income annuities solve for 3 big pieces of the retirement planning puzzle!

Fixed income annuities provide a reliable retirement income stream that’s guaranteed for life, with flexible payment options for the contract owner’s lifetime, (and — if desired — the owner’s spouse), or for a fixed number of years.

“I use fixed income annuities regularly when it comes to retiree clients,” says Samuel Rad, a certified financial planner with Affluencer Financial in Los Angeles. “It’s really the only financial product that offers better than bank returns without the worry of loss.”

Rad defines how fixed income annuities can help retirees gain access to an income stream. “Fixed income annuities offer consumers an opportunity to receive an interest rate based on the stock market, by way of the Standard & Poor’s 500,” he says. “If the stock market declines, the client gets zero percent, in that they don’t lose any money. If the stock market goes up, the client can earn a limited interest return, capped at about 15 percent annually.”

“In addition, fixed income annuities can provide a fixed income just like a pension or Social Security,” he explains. “Many of my clients have enjoyed excellent rates of return in fixed income annuities without being penalized during down markets.”

Fixed Income Annuities: The Fix Many People Need

Fixed income annuities aren’t exactly new, but with the burgeoning problem of Americans lacking sufficient income in retirement gaining steam, they’re an idea whose time has come, experts say.

A report by David. F. Babbel, professor of insurance and finance at The Wharton School at the University of Pennsylvania, shows fixed income annuities could be the key to unlocking U.S. retirees’ income stream problem in their post-working years.

“The list of positive attributes of annuities, i.e. guaranteed payments you cannot outlive, access to investment capital and legacy benefits, the argument for this income solution in retirement is compelling,” Babbel states.

Portfolio return-wise, fixed income annuities are already staking an eye-opening claim in the retirement market. “Many fixed income annuities have outperformed any combination of corporate and government bonds, equity mutual funds and money markets since their inception in 1995, when they were developed as an alternative to mutual funds,” the study reports.

Another study by the Gallup Organization and Mathew Greenwald and Associates for the Committee of Annuity Insurers states that 90 percent of annuitants say annuities “are an effective method of saving for retirement.”

An Insider’s Look at Fixed Income Annuities

So what does a closer look at fixed income annuities reveal? Are they the real deal? Should U.S. retirement savers add them to their portfolio? Are there significant risks involved?

To get some answers, we reached out to financial industry insiders and asked them about the fixed income annuity phenomenon, and whether or not fixed income annuities really produce as advertised.

Here are five key takeaways about fixed income annuities from financial experts:

1. Fixed income annuities work, but only as a component of a larger retirement plan “Fixed income annuities may be one of the better ways to create a lifetime guaranteed stream of income for retirees,” says Jeff Bogart, a financial advisor with Sila Wealth Advisory, in Mayfield Heights, Ohio.

But there are some specific steps to take to maximize their effectiveness. “One strategy is to make sure a retiree has his/her fixed expenses covered through a combination of Social Security and an annuity,” Bogart says. “It is also recommended to start an annuity in one’s late sixties to early seventies.”

2. There are risks involved – Fixed annuities tend to be more cost effective than variable annuities, but there are trade offs such as lack of liquidity and no inflation protection, Bogart adds. “That said, these issues are being addressed by a few insurance companies with refunds of unused portions and a guaranteed increase of the annuity payment every year.

For example, the client can choose, when purchasing an annuity, what percentage increase they want (i.e., 1 percent or 2 percent annually). But, of course, these features and benefits cost more, too.”

3. Watch out for the “cost of living” factor – Vincent A. Virga, president of PFS Wealth Management Group, in Bayonne, New Jersey, says the beauty of a fixed income annuity is that it can serve as a de facto company pension for retirees. “Basically, you provide the insurance company with a lump sum amount and the insurance company will provide you a guaranteed income for your lifetime or for a certain period of time,” Virga says. “Fixed income annuities aren’t new – Caesar used the fixed annuity model back in ancient Rome.”

Unfortunately, historically these types of annuities do not provide a cost of living adjustment, he adds. “Although some insurance carriers are now (for an additional fee) allowing for some type of inflation adjustment on your income, but that should not be viewed from an investment return standpoint.”

4. Fixed income annuities really do create an income stream – Getting a fixed income annuity contract in place that guarantees a certain level of income can ensure the retiree always has enough money for living expenses, says Scott Vance, a financial advisor with Trisuli Financial Advising.

“This stream can be indexed to inflation,” he says. “In my practice, I generally try to make sure that the retirees basic needs are met by a stream of income such as a pension and social security. If living expenses are not covered I will look at an annuity to cover the gap.”

5. Use a fixed income annuity to ensure a retiree does not out live a retirement fund “Say a retiree has a large balance in a retirement account and they want to turn that balance into cash by using a 4 percent rule or other retirement income method,” says Vance.

“I favor creating a deferred fixed income annuity with income beginning at approximately age 75. This annuity would ensure that if something goes wrong with their retirement investments, they will still have guaranteed income from the annuity. They have an income stream later on in retirement to fall back on.”

A Path To Guaranteed Income For Life?

In the end, fixed income annuities require investors and financial service professionals to engage in an intellectual balancing act.

“If you have the fear of losing your money in a market crash, fixed annuities are right for you,” notes Michael Minter, founder of Mintco Financial in Tampa, Florida. “But also know that a fixed annuity though won’t get high stock market returns.”

As Minter states, “With the proper due diligence, an annuity can make the dream of guaranteed income for life a reality.”  When you think about it, isn’t that what Americans really need in retirement?

Use an annuity calculator to estimate how much annuity income you could earn.  Or, take a quick annuity quiz to find out if an annuity is right for you.

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