Whether you’re saving for retirement or you’re in retirement, investments, including stocks, are part of a financial plan. Over the long term, stocks have been a proven way to grow your money, but the ride isn’t a straight line. Stocks have ups and downs along the way, and as you get closer to, and in, retirement, a little certainty can be a very good thing. That's particularly true when you see stocks falling.
One way to add certainty to your financial plan is an annuity. That’s because most annuities aren’t tied to the stock market at all. Here’s how an annuity can protect you from the uncertainty of stocks, whether you’re near or far from retirement.
AN ANNUITY IS DIFFERENT FROM AN INVESTMENT
There’s a simple reason an annuity shelters you from market volatility: It isn’t a stock, bond, commodity or real estate holding with market-driven value. Instead, an annuity is a long-term agreement or contract between you and an insurance company that is often suitable for retirement planning. There are many types of annuities, but, in general, annuities provide guarantees* to help solve two key questions in retirement planning: What will the markets be like in a week, month or years from now? Will I outlive my retirement savings?
HOW ANNUITIES HELP PROTECT RETIREMENT SAVERS FROM MARKET UNCERTAINTY
If you’re saving for retirement, accumulation annuities help you build wealth over time consistently, predictably and in a tax-advantaged way. You can withdraw your money in the future and use it for something else, or you can convert the value of an accumulation annuity into an income stream when you retire (see below). Keep in mind, there are typically penalties and fees if you withdraw from an annuity too early.**
A fixed annuity is one type of accumulation annuity. The savings you put into it grow at a fixed rate. The markets could rise to new highs or historic lows, but in the meantime your fixed annuity will continue chugging along at the same growth rate. This makes it a good option for someone who wants to achieve a level of predictable growth in a diversified retirement portfolio.
HOW ANNUTIES HELP PROTECT RETIREMENT INCOME FROM MARKET UNCERTAINTY
In retirement, your focus shifts from investing to generating income from those investments. While your income needs are relatively consistent, the value of the investments is an uncontrollable variable in your income mix. That disconnect becomes particularly noticeable when the value of your investments falls in down markets. You need to sell more shares to generate the same level of income from your investments, or you can reduce the amount of income you generate from the sale of investments.
An income annuity, on the other hand, is predictable. It’ll provide the same payment, on schedule, for the rest of your life. The amount of income payments you receive will depend on a host of factors, including (but not limited to) when you buy the annuity, how much money you put in it, whether the annuity earns dividends and how long you’re expected to live once payments begin. Keep in mind, unlike an accumulation annuity, you can’t withdraw funds from an income annuity once a payment is made.
An immediate income annuity*** is a lump-sum payment to an insurance company, which in turn promises to make payments back to you for the remainder of your life. That income starts trickling in soon after you make that lump-sum payment, which is why people close to or in retirement often consider them to serve as a source of steady, reliable income.
A deferred income annuity will also provide income for life, it just delays when those income payments begin. During this deferral period, you benefit from growth through increases to your future income payments. If you put the same amount of money into an immediate annuity, your income payments would be lower because there was no deferral period for growth to occur. Therefore, a deferred income annuity may be a good option for someone a few years out from retirement looking to lock in some guaranteed income later.
Whether you’re saving for retirement or in retirement, there are ways to add some certainty to your financial plan. Annuities are one way to do this. A financial advisor can help you explore options that make the most sense for your situation.
*All guarantees associated with annuities & income plans are backed solely by the claims-paying ability of the issuer.
**Withdrawals from annuities may be subject to ordinary income tax, a 10% IRS early withdrawal penalty if taken before age 59½, and contractual withdrawal charges.
***Income annuities have no cash value. Once issued, this annuity cannot be terminated (surrendered), and the premium paid for the annuity is not refundable and cannot be withdrawn.