Why Annuities Can Be a Good Choice for Retirement
December 8, 2014 | Your Finances
Should you consider an annuity for your retirement savings? Few financial products provoke the discussion that annuities do. Yet annuities, which have been around in one form or another since ancient Roman times, are increasingly gaining attention as more Americans find themselves having to rely on their 401(k)s and other savings to fund retirement rather than having a pension plan at work.
When properly understood and used, today’s annuities can help solve one of the biggest dilemmas retirement savers face now. That is, how to create a reliable, guaranteed stream of income that can last for as long as you need it to.1 So why all the debate about whether annuities are a good idea or not?
“Some people love annuities. Others in the media claim that they’re confusing and costly,” said Kurt Bogseth, a wealth management advisor for Northwestern Mutual. “As with any product you might buy, financial or otherwise, it’s important to cut through the broad-brush opinions of others to consider whether an annuity is right for you and your unique situation. Otherwise, you might be missing out on an important opportunity to add a level of certainty to your retirement income planning.”
According to Bogseth, there are two compelling reasons to own an annuity. “First, while other retirement vehicles can provide income payments through systematic withdrawals, annuities have the ability to offer guaranteed income payments for life. In exchange for funds you pay to an insurer, you receive regular, periodic payments that begin at a specified time and last for a set period, say 20 years, or for the rest of your life. You can also opt to have those payments continue to your spouse2 or partner after your death.”
Second, fixed annuities can help eliminate some or all of the downside risk to principal that investors typically face. “When you purchase an annuity, you can tailor your contract to include guarantees that allow you to know in advance that you will receive a certain level of annual income no matter what happens in the financial markets. You can also choose various kinds of death benefit options to protect the value of your annuity for your heirs,” says Bogseth.
Income Now or Later
Depending on the type of annuity you purchase, your income can begin right away or in the future. In the case of an immediate annuity, your stream of payments starts soon after your contract is purchased; with a deferred annuity, your income payments don’t begin until a future date that you specify in advance. This makes deferred annuities an attractive option if you’ve maxed out of your 401(k) or other employer-sponsored plan and want to save more for retirement.
Annuities can also offer tax-deferred growth that can either be fixed or variable. “Fixed annuities pay a lifetime guaranteed rate of interest,” explained Bogseth. “In contrast, variable annuities enable you to have your money placed in investment portfolios that you select, which means your income payments ultimately will be determined by the performance of those investments.”3
Some skeptics argue that these guarantees translate into high annuity fees and expenses. But not all annuities charge high fees. “While annuities may seem expensive relative to other retirement planning choices, they provide a combination of benefits that other retirement income products simply can’t provide,” said Bogseth. “They may also provide access to more investment choices than you might get through a 401(k) or other qualified retirement plan.”
Keeping Pace with Retirement Needs
Bogseth also believes that annuities have come a long way in meeting the needs of today’s investors to create a sustainable source of reliable income in retirement. For example, some people shy away from annuities because they worry that if they die early, the insurance company “wins” and their heirs “lose.” Not so, says Bogseth. “Today many annuity contracts contain provisions that guarantee annuity payments for a minimum amount of time, say 20 years. That way, if you die before receiving all of your guaranteed payments, your heirs will continue to receive them for the remainder of the period. You can also opt to continue income payments to your spouse2 or partner after your death for as long as he or she lives.”
Some investors worry about locking in their money at today’s low interest rates, especially when many experts suggest that interest rates are bound to move higher in the future. So, while some annuities do not offer the same levels of liquidity as other retirement vehicles, new breeds of annuities can still provide investors unique flexibility to address market realities. Specifically, Bogseth points to two innovative annuities offered by Northwestern Mutual.
Built for Today’s Needs
“The Portfolio Deferred Income Annuity and the Portfolio Immediate Income Annuity are the only products in the marketplace that offer guaranteed income you can’t outlive with the potential for growth through dividends,”4 Bogseth said.
Initially, the Portfolio Income Annuities were available only for tax-qualified funds, such as 401(k)s, IRAs and Roth IRAs. However, Northwestern Mutual recently launched a version of each for the non-tax-qualified market. “Investors now can use after-tax dollars to take advantage of these patent-pending products. This may be especially attractive to people who have received money from the sale of a business, sale of a home, an inheritance, stock options or a bonus, and they don’t want to wait for interest rates to move higher before turning those funds into a source of guaranteed income either now or sometime in the future.”
Do You Need an Annuity?
That depends. As life expectancy continues to increase, many people will spend more of their time—and their money—in retirement. “Few Americans these days have a pension plan to fall back on; most will rely on their 401(k) or other workplace retirement plan and savings to fund their golden years,” says Bogseth. “For many, an annuity can provide an attractive addition to their retirement planning strategy by offering steady, guaranteed income.”
Bogseth understands that media hype can make it difficult for investors to determine whether an annuity is appropriate for their specific circumstances. Every individual enters retirement in a different situation and with different needs. That’s why he recommends working with a financial professional who understands what it takes to create a sound retirement income plan and, when appropriate, to help you select the right annuity.
Bogseth also suggests you carefully consider the insurance company behind the annuity. “Because all annuity guarantees and benefits are backed by the claims-paying ability of the insurer, the company behind the annuity matters. You’ll want to work with a company that has the financial strength to weather market ups and downs along with you.”
Here’s the bottom line according to Bogseth: “Apart from Social Security and pension plan benefits, annuities are the only asset that enables you to turn your savings into a source of reliable income that will last your entire lifetime, no matter how long that is.”
1 Guarantees in an annuity are backed solely by the claims-paying ability of the issuer.
2 In some states “spouse” includes a registered domestic partner.
3 The underlying investment options are subject to market risk, including loss of principal, and are not guaranteed.
4 Dividends are not guaranteed.
To be used with form numbers: ICC13.NN.PSPIA.(0713) and ICC13.NN.PDIA.(0713) or state equivalent. Not all contracts are available in all states.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries.