Important points
Many investors, worried about the U.S. stock market and economy, are looking for guaranteed income in retirement. Annuities are a type of guaranteed income product that investors can buy, but experts say they’re not suitable for everyone. Some financial advisors recommend fixed indexes. Annuities provide protection against downside risk, but they also offer lower-than-market returns.
Many investors are worried about the U.S. stock market and economy and are looking for guaranteed income in retirement.
A recent study by American Century Investments found that more than half (54%) of investors are interested in guaranteed lifetime income options within or outside of their workplace retirement plan.
In the past, retirement savers relied on Social Security and pensions as a regular source of income. However, with fewer pension plans in the world and Social Security benefits expected to decline in the future, many investors are turning to pensions instead.
“Many people who are retiring now don’t have that option, so they’re going to have to take their savings and buy their own pension, which means they’re going to use their pension,” said Alera Group Senior Wealth Director. said advisor Michael Resnick.
An annuity is a financial product, usually provided by an insurance company, that promises to pay a fixed amount periodically over a specified period of time.
Pension sales are expected to rise 20% to $216.6 billion in the first half of 2024 and exceed a record $400 billion by the end of the year, according to data from LIMRA, the insurance industry trade group.
Experts say that while annuities may be a good fit for some portfolios, they’re not for everyone.
When do pensions make sense?
For investors who are risk-averse and concerned about volatility, having a portion of their retirement savings in an annuity may help them sleep easier at night, Resnick said.
He cites the example of a widowed client who was able to weather the Great Recession of 2008 because of the guaranteed income and capital protection she received from her pension.
And market volatility is a top concern for many investors, with more than half (56%) of respondents in the American Century Investments survey saying that today’s markets are so volatile that more than their peers believe that people need to manage their money more carefully.
“Money doesn’t last forever,” says Dawn Santoriello, a certified financial planner and founder of DS Financial Strategies, even if past misselling of products has created negative perceptions. , added that pensions are useful.
CFP Len Nassi is a fan of fixed index annuities, which provide returns tied to the performance of a specific stock index, such as the S&P 500. Fixed index annuities minimize downside risk, but also have a cap on potential returns. .
“There’s always a cap, and even if the S&P 500 is 20%, that means you’re not going to get 20%. But if you go down 10%, you haven’t lost a nickel,” Nassi said. Ta.
This reduction in returns is due to the participation rate and interest caps to which fixed index annuities apply. The contract defines the participation rate. This means that the return is limited to a portion of the index’s total return. For example, if your participation rate is 75% and the index increases by 10%, you will be credited with 7.5%. Additionally, even if that annuity has a 6% interest cap, you can only receive up to 6%, not 7.5%.
Who should avoid pensions?
One of the biggest issues with annuities in general is that they are complex products, so investors may need to read the fine print to determine whether it’s a worthwhile investment.
Almost half (48%) of annuity customers surveyed by J.D. Power said they do not fully understand the costs and fees associated with their annuities.
When you purchase an annuity, you typically pay a large commission to the agent who sold you the product, as well as administrative fees such as underwriting fees and fund management fees. Money earmarked for these costs is not invested.
Mr. Santoriello also said that annuities may not be a good option for younger investors (those under 50) or those who believe they need the funds before a surrender schedule or contract term expires. .
If you need the money before that, you could face penalties from the annuity issuer and the IRS. The insurance company that sold you the annuity may charge surrender charges if you withdraw your money early. If you are under age 59 1/2, you may be subject to a 10% tax penalty from the IRS if you withdraw your pension prematurely.
