What most people don’t know about annuities (But should)
Yogesh Prasad, CFA, CAIA
CEO & Founder of Confluent Asset Management
Annuities have become a significant component in the retirement income strategy of Americans as they get into and live through retirement. These financial products are offered by insurance companies, uniquely combining investment and insurance features into one flexible yet protective solution. Following are a few facts that make the case for annuity allocation in your retirement portfolio, as reported by a study conducted by J.P. Morgan Asset Management and EBRI:
- 3 in 4 investors de-risk their portfolio at retirement
- Investors, on average, reduce their equity allocation by 17% as they attain their retirement.
- 25% of the surveyed investors reduced equity allocation in their retirement portfolio by more than 55%.
Here’s why annuities are so apt for today’s investment scenario.
Key benefits of annuities
Lifetime income
Income guaranteed to continue either immediately or at some date in the future offers security for a lifetime.
Growth potential
Early investment in annuities can offer long-term growth through varied investment options. Growth is contingent upon the performance of the various selected investment options.
Tax deferral
Tax-deferred growth allows affluent investors to maximize their returns over time, avoiding the drag of annual taxes on gains.
Legacy options
Optional riders include the protection of death benefits for loved ones and usually come with an additional cost.
Learn more about how annuities can compliment your portfolio
Meet with an advisor today and discuss how you cant take advantage of annuities to bolster your long-term investment portfolio. No consultation fee or long-term commitment.
Addressing common retirement challenges with annuities
1. Income Generation
The Challenge:
While most retirees have accumulated substantial savings, converting this nest egg into reliable income remains a challenge in a low-yield environment. Although interest rates have risen over the recent past, their decline and market volatility have raised uncertainty for income planning.
The Solution:
Annuities create diversified income that supplements dividends, interest, and capital gains. Through systematic withdrawal strategies, annuities help retirees produce consistent income while preserving the principal for future needs.
2. Longer life expectancy
The Challenge:
Longer life spans raise the possibility of outliving savings for those who remain healthy and come from long-living families.
The Solution:
Insurance companies use the power of the law of large numbers in pooling resources to provide predictable lifelong income streams. Mortality credits further enhance the potential for more income, hence making annuities an ideal option in maximizing lifetime income. A study conducted by J.P. Morgan Asset Management and EBRI indicates that households with consistent annuity and/or pension income spend more, despite having similar levels of visible retirement wealth.
Source: “In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute & J.P. Morgan Asset Management.
3. Emotional biases
The Challenge:
Market volatility often forces emotional decision-making, which derails long-term investment goals. Badly timed decisions often translate to losses.
The Solution:
In-built features such as penalties on withdrawals discourage investors from making reckless decisions while enabling them to stay the course. Annuities also provide additional optional riders to protect investors from market fluctuations; thus, volatility can be survived with greater surety of safety.
4. Market timing risks
The Challenge:
For retirees, market conditions at the time of retirement are unpredictable and may be just a little more than they can bear.
The Solution:
Timing risks are reduced through the dynamic withdrawal strategies possible with variable annuities. Solutions provide flexibility to adjust income streams from the product based on market performance, leading to greater stability in the retirement plan.
A holistic retirement income solution
Annuities are both flexible and reliable solutions to your toughest retirement challenges. Annuities can also help clients achieve:
- Guaranteed lifetime income
- Protection against market volatility
- Tax-deferred growth opportunities
- Confidence in achieving financial security during longer life spans
Financial advisors should lead clients through a very deliberate consideration of the benefits, trade-offs, and costs of annuities within the broader retirement strategy. When used appropriately, annuities can offer peace of mind and financial flexibility for retirees to enjoy their golden years.
Take the next step to adding annuities to your financial plan
Meet with an advisor today and discuss how you cant take advantage of annuities to bolster your long-term investment portfolio. No consultation fee or long-term commitment.
Disclaimer
The views, information, or opinions expressed in the above article are solely those of the author and do not necessarily represent those of any affiliated organizations, institutions, or entities. The article is meant for informational purposes only and should not be considered as professional investment advice. Past performance is not indicative of future results. The stock market is inherently risky, and investors may lose part or all of their investment. The author does not guarantee the accuracy, completeness, or timeliness of the information provided. Any reliance you place on such information is strictly at your own risk. If the article contains forward-looking statements and projections that are based on current expectations, estimates, and projections about the stock market and the overall economic environment. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. The author is not a licensed financial advisor, and this article should not be construed as a recommendation to buy, sell, or hold any investment or security. Before making any investment decisions, readers should consult with a qualified financial advisor to discuss their individual situation and risk tolerance. The author may hold positions in some of the stocks or financial instruments mentioned in this article. However, this does not influence the objectivity of the content presented. This article is protected by copyright laws and may not be reproduced, distributed, transmitted, displayed, published, or broadcast without the prior written permission of the author. By reading this article, you acknowledge that you have read and understood this disclaimer and agree to hold the author and any affiliated parties harmless from any losses, damages, or consequences resulting from the use of information contained within.
