Understanding Annuities Used For Retirement Planning
This past year, total annuity sales hit a record high that has not been seen in over ten years.
According to the Secure Retirement Institute, total annuity sales in the United States reached $241.7 billion, which is the highest total annuity sales since 2008.
Why is everyone buying annuities all of a sudden? Should you be too?
There are a few things you should understand about annuities before making a decision. Keep reading this comprehensive guide to learn more about retirement plan annuities and discover which one is right for you.
Making Sense of Annuities
When it comes to planning for retirement, it is essential to understand your options. Having a steady income source is critical for retirement and will give you peace of mind knowing you have that income to rely on.
More and more individuals over the past few years have been purchasing annuities while building a retirement plan and for a good reason.
Annuities are a type of insurance payment that you trade a lump sum of money for, in return for a series of fixed payments that are paid to you at regular intervals.
When setting up an annuity, you will have a few options, like would you rather pay a lump sum of money or a series of payments? You will also have to decide when you want the payments to begin. You can start an annuity to begin immediately, called an immediate annuity, or you can set a date in the future, called a deferred annuity.
It is also essential to keep in mind you will have to set a timeline of how long you will want to receive the payments, whether that be for the rest of your life or a set amount of time that you have determined.
Annuities are an excellent option to have when planning your retirement because it will help supplement retirement income when you need it most.
Types of Annuities
There are a few different types of annuities to keep in mind while looking at your options. The three main types of annuities are fixed annuities, variable annuities, and indexed annuities.
Fixed annuities are continuing to make up the majority of the total annuity sales. According to LIMRA’s 2019 first quarter U.S retail annuity sales survey, total fixed annuities grew by 38 percent quarter over quarter.
This is a trend that has been observed over the past few years, with fixed annuities doing better than variable annuities in 11 of the past 13 quarters.
The reason more people are going with fixed annuities is due to the fact they are safer and have a set amount the buyer is guaranteed to receive. To do this, the insurance company will invest money in only safe investments like highly rated corporate bonds and U.S treasuries.
Companies can gauge the bond’s worthiness and quality based on the bond’s credit rating. The investments are graded on a scale of “AAA” to “BBB-” and are ranked by private companies such as Standard & Poors and Moodys investor services.
The higher the rating an investment receives, the more trustworthy the issuer is considered and is based on the financial strength and the ability to pay interest. Also, the higher the investment rating, the lower the interest rate will be.
Variable annuities differ from fixed annuities due to the risk that is associated with them. With a variable annuity, the issuer will invest in mutual funds.
The performance of the portfolio will determine the payout the buyer will receive. Many people invest in variable annuities with the hope of a larger payout at the end. Still, as you can see, fixed annuities have been outperforming variable annuities for the past few years.
When it comes time for you to choose your retirement plan options, keep in mind variable annuities are subject to market risk and should be approached with caution.
With indexed annuities, the issuer will pay an interest rate that is based on the return of a certain market index, like the S&P 500.
The benefit of an indexed annuity is the buyer will receive a higher yield when the market index is performing well. The problem is many issuers will provide specific provisions in the contract that limit the amount you can receive as the market is doing well.
They also provide a minimum return that varies from company to company but will ensure that even if the market is performing poorly, you will still receive a return.
How to Make the Right Choice
With so many options presented to you, things can get confusing when it comes to planning your retirement. Luckily there are a few things you can ask yourself that will help you determine which plan is right for you.
Do You Need Consistent Income?
This is an important question to ask yourself when you are nearing retirement. If you need consistent income and are close to retirement or already retired, a fixed annuity may be the best option for you.
With the fixed annuity, you will have guaranteed fixed payments that you can rely on having when you need it. This plan will give you peace of mind knowing you will have a payment coming, and it isn’t subject to market risk.
Are You Willing to Risk?
How much you are willing to risk will be a significant determinant in what retirement plan is best for you. If you want to play it safe and have a guaranteed set amount paid out to you, then a fixed annuity may be best suited for you.
Do You Need the Money Now?
This is another vital question to ask yourself while building a retirement plan. This will help determine what program is best suited for you and your needs.
If you need the money now, you may want to consider an immediate annuity. If you can wait some time before withdrawing, you could consider a deferred annuity to allow some time to save.
Need Help With Retirement Plan Annuities
Now that you know what your options are when it comes to retirement plan annuities, it is essential to remember you have options and should meet with your financial Advisor to go over the right decision for you.
If you need help planning for retirement and would like to go over your options, contact us today, and we can help you decide what’s best for you.