Worst of Times? Best of Times!
September 30, 2012 by Dennis Sweenor
Published September 28, 2012
Affected by declining interest rates more than any other group, seniors’ dependent on interest income from investments such as CDs and Treasury Securities find themselves scrambling just to maintain a modest living. Interest rates are at the lowest levels not seen in more than 10 years! Seniors continue to find their living expenses increasing, while income decreases—recipe for personal financial disaster. So much for the golden years!
To maintain a lifestyle that we have come accustomed to, we must consider a solution that should not only be conservative in nature, but also designed to maintain a good rate of return to provide an income stream that one cannot outlive. The lifetime income guarantees offered with fixed indexed annuities can add security to portolios that are mostly composed of stock and bond mutual funds.
A downturn in the market right before retirement can leave most conservative investors with far less money to live on as planned and minimal time to recoup their losses, increasing the risk of falling short of their goals. Putting a portion of retirement money in annunities, retirees can rely on a more dependable income stream they cannot outlive.
When it comes to retirement assets, many people hear the word “annuity” and don’t know what is being discussed. If you’re one of these people left wondering, “What is an annuity?” relax. Annuities are actually easy to understand, especially when you can get some clear answers to your most basic questions.
An annuity is a financial contract between you and an insurance company. You purchase an annuity with a certain amount of money called a “premium;” in return, they agree to provide you with a stream of income in retirement, with benefits depending on the contractual terms.
It can be helpful to think of other types of financial vehicles to contrast annuities. For instance, a Certificate of Deposit (CD) is a savings vehicle with a contract between you and a bank. Contracts can carry different terms and benefits, as well as maturity dates. However, where a CD is backed by some Federal Government guarantees, an annuity is backed by guarantees from the insurance company who issues it.
The purpose of an annuity is to turn monetary assets like savings into an income stream, whether you need income immediately or at some point in the future.
Under the umbrella of that broad purpose, each type of annuity provides income in different ways and so has its own specific purpose. An immediate annuity can act like your own “personal pension” because you purchase the annuity with one lump sum of money in exchange for income over a specified period of time, or the rest of your life, depending on the terms of the contract. You can find annuities that provide the income you need for as long as you need it.
A deferred annuity has a purpose. You can contract for a fixed rate of income by agreeing to allow your premium to grow for a fixed period of time before starting an income stream. With a deferred annuity your premium amount will grow tax-advantaged, because you don’t pay taxes until you start withdrawing.
A fixed annuity provides a guaranteed rate of interest on your premium for a specified period of time, sometimes until you start withdrawing income. Most annuities have a surrender period for the first 5 to 15 years of ownership; early withdrawal will deplete your principal by the amount of surrender charge still in force. Bonus annuities may carry higher fees and charges than annuities without the bonus feature, and may not pay the bonus in case of early withdrawal.
An indexed annuity has characteristics of both the fixed and variable annuities. There is a guaranteed interest rate and protection of principal of the fixed annuity, along with the potential to participate in market gains without exposing your principal to market risk. Some of the features that are available in fixed index annuities are bonuses, various crediting methods, and allocation options that give you choices for your money.
Annuities, depending on your particular situation may be right for you. Understanding what an annuity is, you can evaluate your circumstances and choose the one best suited for you. The greatest gift one can give to himself is the peace of mind knowing that your financial security is safe and you cannot lose your nest egg at the worst possible time and when you need your money the most—during your golden years of retirement.
Dennis Sweenor is a retirement planning specialist located in Queensbury, New York. Specializing in helping seniors and retirees achieve the retirement of their dreams, Dennis can be reached at his office at (518) 307-9463.