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I am retiring soon and I am nervous about having a lot of my retirement dollars in the stock market. What are the annuity products I have been reading about that guarantee retirement income for me?

Jan 05, 2012 by Dylan from Houston, TX in  |  Flag
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Shawn A. Wilson Level 9

Most likely a packaged product issued by an insurance company called a variable annuity with guaranteed living benefits purchased for the benefit of either you alone or the inclusion of your spouse or domestic partner. Inside this variable annuity are sub-accounts that consist of many different asset classes from different investment companies and usually model portfolios to assist in diversification. The guarantee lifetime income is a rider that is purchased or chosen at the time of purchase that gurantees a payout regardless of market performance to begin immediately or at a deferred date. Some companies allow you change or upgrade your benefit once per year or every three or five years. This may be an important feature if and when sudden events, such as a death of your spouse prematurely. The rider is an annual or quartterly expense deducted from your annuity, from. 65% for single life to 1.80% for joint life, in addtion to the standard Mortality & Expenses, ranging from 1% to 1.25% or higher, and of course expenses of the sub -accounts which can exceed 1%. The variable annuity with guaranteed benefits comes in many forms and should be researched carefully, especially the ratings of the issuing insurance company. The cost of ownership is extremely high and must be considered in addition to your annual withdrawal expectations as the internal expenses can push the overall withdrawal rate in excess of 8% to 10% due to the expenses. They are many carriers of these variable annuity and many advisors sell them as their core business mainly for the commission that is generated to them personally which can vary from a low of 1% for a penalty free annuity to a high of around 8% and sometimes higher. So when speaking with a commissioned advisor understand there is an economic benefit for them to sell you the annuity. You also may not receive active monitoring and attention after the sale as the advisor does not have a fiduciary duty to give you advice that is in your best interest, the sale just needs to meet the suitability standard. Do a ton of research, investigate companies, investigate the advisor and the best advice is to seek the guidance of a fee-only financial advisor who will be 100% impartial as a fiduciary to you and give you advice that is in your best interest. Shawn

View all 6 Comments   |  Flag   |  Jan 05, 2012 from Middleburg, PA
Steve Casull

Maybe before Jason tried to steer you to his annuity website, he should state, that the annuities are not guaranteed by the federal government. And they claim to be collateralize d with bonds, but what if the bond market takes a dive and the insurance company that is guaranteeing the annuity goes bankrupt? AIG did in 2008.

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Flag |  Feb 18, 2015 near South Jordan, UT
Adam

Steve - Unfortunately all of us (the taxpayers) will bail them out. The fact that AIG went bankrupt had nothing to do with their annuity business. That being said, I'll never sell an American General annuity contract, there service is terrible and I feel as a company they are too aggressive.

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Flag |  Oct 28, 2016

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Eric Level 17

The simple question an investor has to ask itself is what are annuities used for? Annuities are a way to guarantee lifetime income. A pension is the annuitization of a sum of money for example. So if annuities are for guaranteeing income, why would someone want me to buy an annuity during the accumulation phase? Ponder that and you will find the answer you seek. On another note, Evan Levine touched on this in a comment, but I thought it would be best to put it in an answer. One of the products not being discussed is a single premium immediate annuity (SPIA). These simply guarantee income for life after you put a lump sum of money into them. These products are the purest annuity in the definition of the term in my opinion. I would recommend finding a fee only advisor in your area that works for an independent RIA. He or she will be able to give you more customized advice based on your situation.

Comment   |  Flag   |  Jul 19, 2012 from Denver, CO

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We live in a world where the "risk-free" interest rate is nearly zero and high-quality long-term bonds yield something like 3 or 4%. Everyone lives in this world, including insurance companies.

The answer Shawn gave above about Variable Annuities is correct: they tend to be very expensive. So you need to ask yourself a common sense question. Whereas interest rates are so low, and variable annuity costs are so high, how can they truly be a good investment for the consumer?

Another option is to buy a Fixed Annuity. You can usually choose a fixed rate for a certain period of time, or a floating interest rate that's typically based on the Treasury Bill rate. Fixed Annuity rates are in the 4% range but be aware they typically impose a penalty period for "early withdrawal."

For someone like you, who's soon to be retired and wants to live off some of your assets, it's a really crummy situation that interest rates are so low. The combination of low interest rates and longer life-spans is creating a big concern for pretty much all Baby-Boomers: the risk of out-living one's money.

My advice: seek out several financial advisors and ask them how they will help you navigate through retirement. Then hire the one that makes the most sense to you; not the one who makes the most promises.

You'll be able to roll-over much of your retirement savings into a self-directed account and implement an investment strategy specific to your situation.

Comment   |  Flag   |  Mar 07, 2012 from Bryn Mawr, PA

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In addition to the responses I want to advise you on one more annuity that has not been discussed yet, and if you are in the market, you will soon learn about. These are Index Annuities, sometimes called Equity Index Annuity. Now I cannot tell you if this product is good for you or bad for you. The important information, if you are interested, is too learn about the issuing insurance company, and their ratings.

Next I would advise against purchasing such an annuity from an Insurance Only Agent. There are many Investment Advisors out there that are both Insurance licensed and securities licenses that will better advise you, with less conflict of interest. Last do not put all of your money in these products, they should only be part of a larger asset allocation for your total portfolio.

-Index Annuities

The Good

-Index annuities allow you to participate in the gains in the S&P 500 (or other indices), but not participate in the losses. (This sounds good, right? Hang on their are good and bad to these product) -Principal Protection -Index Annuities often pay a premium bonus from 5%-20% (Usually restrictions, vesting schedules, and long surrender period) -Have income riders that roll up your account with a guarantee of a % generally 5%-8% (this has a fee) -Index Annuities do not have M&E fees, or subaccount fees you see in Variable Annuities -For Non-Qualified money, they will shelter your money from taxes as a tax deferred account. -You can access 10% of your balance a year penalty free (except the first 12 months)

The Bad

-When you participate in the market, your growth is capped, and these caps can change annually. So if the S&P500 gained 11.2% and your cap was 5% you only get 5% -Long Surrender periods, with high surrender costs. Typically these annuities average a 10 year surrender period with the first several years having surrender charges in the 12% range (ouch!) -The Income rider has a fee generally about 1% -The income account value, the guaranteed rollup, is not available as a cash surrender, it's an imaginary value for calculating your guaranteed income steam...It can only benefit you, if you take a guaranteed income for life.

In summary, these products are not for everyone, they have to meet your needs. My suggestion is, if you are concerned about outliving your income, you don't plan on making any withdrawals(other than the income stream), you are happy taking a lifetime income, you are aware and do not mind having your money locked up for 10 years, and you are more conservative and do not want your all your assets in the market. This may add a valuable piece of your total portfolio.

1 Comment   |  Flag   |  Mar 08, 2012 from Gilbert, AZ
Evan M. Levine, ChFC

One option is a fixed immediate annuity. Under this approach, you give a large lump sum to an insurance company which in turn guarantees you a certain amount of income for your lifetime, You can choose between a single life option which continues for your life- time only or a Joint and survivor option which continues for the lifetime of the annuitant and a spouse. Typically there are also " period certain" options where the income is guaranteed for a minimum number of years ( 10, 15) even if you didn't survive that period. Each option equates to a different income amount.

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Flag |  Apr 19, 2012 near Port Washington, NY

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Don Unger, MSFS Level 18

There are several types of annuities that can provide income. There is the SPIA or Single Premium Immediate Annuity that will provide guaranteed income for a specific period of time, 5 years, 7 years, 10 years or lifetime. The interest rate assumptions used right now make these not the best choice. Then there are Variable Annuities and Index Annuities that can be purchased with some type of guarnateed lifetime income rider. There is potential for increasing income using one of these as they both have some link, either direct or indirect to the equity markets.

A good independent financial planner or insurance agent can see if it is appropriate for you to use one or a combination of these types of annuities for a portion of your retirement nest egg to at least provide a base income stream for you.

Comment   |  Flag   |  Oct 02, 2012 from Henrico, VA

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Dylan, when thinking about annuities I am in agreement with Mr. Levine in that a fixed immediate annuity is an option to consider as a way to provide a guaranteed stream of income that you can't outlive. As mentioned you have single or joint payer options with beneficiary designations. I have used these in the past with clients whose companies discontinued their pension plans or where the monthly income to be generated from the annuity is greater than what the comparable pension distribution would be. Regards, Crawford.

Comment   |  Flag   |  Oct 24, 2013 from Detroit, MI

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Richard P Taylor Level 17

There has been some excellent discussion in the previous posts about annuities. A few things I would add to help you. There are many annuity/insurance companies out there. All of them have slightly different features, benefits, costs, etc. It's fairly daunting for us financial professionals to keep up with all of them because there are so many and they change all the time. That being said, it would be in your interest to sit down with a quality professional in your area to determine if any of them would be a good fit for you. I have found very few circumstances in which they make sense for an investor myself.

Comment   |  Flag   |  May 22, 2015

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Steve Casull Level 13

Annuities are not guaranteed by the federal government. And they claim to be collateralize d with bonds, but what if the bond market takes a dive and the insurance company that is guaranteeing the annuity goes bankrupt? AIG had to be bailed out in 2008.

Let's get real. You don't withdraw all of your money the day you retire. So what if the market goes down the day you retire? With a proper allocation and a good Financial Advisor at a SMALL firm (small firms have the same protections as big firms, but without the outlandish sales quotas), you can plan a good strategy at an ultra low fee, thus avoiding the pitfalls of annuities. Don't be pacified by a WORD like "guarantee" without basis. FACT: If the market collapses and your allocation account becomes worthless, money won't be worth anything anyways. Period. But if the market corrects 10%, 20%, you change the allocation, and ride the market back up. Remember, if the market doesn't go back up, it has to collapse. The market can't hold a straight horizontal line forever and survive. Ask yourself, would you or anyone else invest in anything that didn't go up? And if there are no investors that will invest, then the market will collapse.

This is why I do not agree with the HALLMARK attitude in our industry of the closer one gets to retirement, the more of the allocation should shift to allegedly safe fixed income. Fixed income pays garbage now, well below inflation. So it is in a fact, losing value. Why be locked into a large allocation to something that is losing value when compared to inflation? Also, The fixed income/bond market took a bath in 2008 along with the equity markets, but the equities and bond markets are back. And as I stated before, one doesn't withdraw all their money the day they retire. The allocation should be based on market dynamics of the time, and not on the age of the investor. And I know this goes against what we've all been brainwashed with for years. But tell me, where am I wrong?

2 Comments   |  Flag   |  Feb 18, 2015 from South Jordan, UT
Kathleen Nemetz, MBA, Certifed Financ...

Neither annuities nor life insurance are backed by the federal government. That doesn't mean you shouldn't consider them. Unless you believe that major blue chip companies like MetLife and John Hancock are about to go under you should consider that their products are backed by their own creditworthiness, in the A range of bonds. You can check the viability of any insurance company by going to the website AM Best. There are many annuity products. Those with guarantees of lifetime income can be either immediate annuities or deferred annuities with lifetime riders. Whether they are a fit for you should be a conversation that you have with an informed financial planner. If you are at risk for running out of retirement income then this is an option you cannot afford to dismiss.

Flag |  Apr 30, 2015
Steve Casull

I never said NOT to consider life INSURANCE. It's insurance, not an investment. What I take issue with, and so should anyone in a Fiduciary capacity, is that Annuities are being over sold as investments. Term insurance along with an allocation of ETF's can have a much better performance with much less fees
. Do any of the Annuity Salespeople here tell their client before they sign the contract locking that person in, that MOST annuity owners never end up annuitizing? This is a fact, anyone being sold an annuity should "google it", and then ask them-self who the heck they are entrusting with their money.

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Flag |  May 19, 2015 near South Jordan, UT

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