4 Ways Annuities Can Help Lower Retirement Income Risk

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In a time of increased economic uncertainty, finding solutions that provide both retirement savings and regular income later in life becomes even more important. As companies look to recover from economic downturn, history shows employee retirement programs are often targeted.

After the Great Recession of 2008, over 200 large companies suspended 401(k) matching.1^Munnell, Alicia H. and Quinby, Laura D. “Why Did Some Employers Suspend Their 401(k) Match?,” Center for Retirement Research at Boston College. Feb., 2010 And early signs are showing history may repeat itself as companies look to overcome the economic downturn of the COVID-19 crisis.2^Tergesen, Anne and Holger, Dieter. “Companies Hit Hard by Coronavirus Look to Cut 401(k) Contributions.” Wall Street Journal, April 1, 2020 The COVID-19 crisis may also lead to consumers dipping into their retirement savings in order to compensate for lost salaries, as studies show many Americans have not properly saved to deal with economic emergencies. 3^ Society of Actuaries. “Aging and Retirement: Impact of COVID-19 on Retirement Risks.” April, 2020

It can be a difficult time, especially for those who have worked multiple jobs to attain their retirement goals.4^ IALC, “The State of America’s Workforce: The Reality of Retirement Readiness.” April, 2018But, taking a diverse approach to retirement savings can help create a secure savings plan; one that weathers economic storms and offers the promise of regular income distribution through their retirement.

Annuities can be a helpful tool in that strategy. Annuities are insurance products where either a single or recurring premium payment is held by an insurance company that will make payments to you in retirement. 

There are three different types of annuities: 

• Variable annuities are tied to the performance of a consumer-chosen investment portfolio and can increase or decrease in value based on performance, meaning neither the principal nor the interest earned is guaranteed.
• Fixed annuities accumulate interest based on a fixed interest rate, determined at the start of each interest rate period. Fixed annuities are guaranteed for a set period of time during which they cannot decrease in value as a result of changes in the interest rate environment. 
• Fixed index annuities offer parts of the other two annuities, accumulating interest based on the performance of an external index, such as the S&P 500® Index, and providing principal protection from index volatility.

Balancing the amount of risk is a challenge for anyone. But, in a time when protecting your money has become even more crucial, choosing the annuities that best protect retirement income can be important. 

Here are four ways annuities can help lower retirement income risk:

Principal Protection

When it comes to preparing for their future, few things rank higher with today’s older workforce than protecting their hard-earned money. That protection ranked at the top of the list for 71 percent of future retirees surveyed in a 2018 Index Annuity Leadership Council (IALC) study.4^ IALC, “The State of America’s Workforce: The Reality of Retirement Readiness.” April, 2018 Fixed and fixed index annuities, as part of a comprehensive strategy, can help provide the cornerstone of a retirement income plan that puts protection front and center. 

Lifetime Income

Annuities can provide a simple formula for retirement planning. During the accumulation period, interest may accumulate on money held in the annuity. Then, income payments can be taken as either a lump sum or fixed installments over a specified period (for example, over 20 years), or as guaranteed payments for life depending on the product purchased with interest still accumulating.

In general, fixed index annuities don’t have any of the associated mortality and expense fees, management fees or administrative fees that can be associated with variable annuities. However, since they are intended to be long-term products, there may be fees for withdrawing more than the allotted penalty-free amount from a fixed index annuity.   

An optional lifetime income benefit rider offers another choice for annuity owners to receive income, allowing the owner to receive lifetime income payments determined by the annuity rider provisions. Some riders come with no fee while others come with an annual fee.*^Lifetime income benefit rider values are only used to calculate lifetime income payout amount and is not part of the underlying contract value or available in a lump sum. See product sales brochure and disclosure for details.The content provided is for informational purposes only and does not constitute advice. For specific details on how this may apply to your personal situation contact your personal financial advisor or insurance agent for more details. 

Tax-Deferral

Annuities can also help shield money from annual taxation on interest, as long as funds remain in the annuity. That’s because, generally, the funds held in an annuity aren’t taxed until they are withdrawn, at which time the distribution is taxed as ordinary income. 

Because an annuity offers the opportunity to earn interest on principal, on interest earned and on taxes deferred, it offers a path to jump start retirement assets that may not be available with a non-tax deferred account. 

Growth

Annuity owners typically have the flexibility to choose among a variety of index-linked crediting strategies, many of which include a cap or participation rate. Once interest is credited, it can never be decreased because of index volatility. That provides the benefits of market-related growth without the risk of a variable annuity.

For those who have annuities as part of their overall retirement strategy to help protect their money, economic uncertainties may become a little easier to deal with thanks to the predictability of scheduled income payments in their retirement. 

 

 

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