Thursday, February 24, 2011
Fixed-Annuities: A Good Solution To Outliving Your Retirement Nest Egg
Young adults are often fearful of dying too soon and not living a full and long life. Ironically, this fear often changes as one reaches the age of retirement. Since many retirees are in the precarious position of possibly outliving their retirement savings, there is suddenly a fear of living too long.
No one should fear living too long. There are some possible solutions to the precarious situation. One is to use a fraction of your retirement savings to buy a fixed annuity contract. This will ensure that you'll have payouts for the duration of your life.
If you aren't sure if your savings will last through the next twenty plus years of your life, annuitizing some of your retirement savings can be advantageous and allow you more investment flexibility. Depending on what your acceptable risk and financial goals are, the remaining amount of savings can be more aggressively invested for a higher return since you're ensured by the annuity that you'll never be without funds.
One word of caution for those considering an annuity would be that the quality of the annuity is only as good as the underwriter. Therefore, the best option is to purchase the contract from an insurance company that's financially sound and will most likely remain highly rated.
There are some other options to also consider. Annuities that feature locked in interest rates have been a growing concern among some investors, especially if the annuity was purchased during low interest levels on U.S. government securities (the measurement source for annuity interest rates). The annuity market has responded to this concern by offering several new cost-of-living-responsive options for annuity contracts.
To account for the increase cost-of-living, some options offer a lump sum payment, increase payments annually by three percent, or adjust payments by Consumer Price Index fluctuations. It's clear through these new options that the annuity market has recognized that the face of retirement is drastically changing and that consumers need products that work better to serve their specific needs, instead of a one-size-fits-all product.
It would be disingenuous to just say that fixed annuities ensure a retiree will never run out of funds. An annuity, like all financial vehicles, have a downside. Fixed annuities, as the name insinuates, are fixed, meaning that once an annuity contract is entered, there isn't usually a way out of it. You also must keep in mind that you won't control the invested portion of money any longer if you use it to purchase an annuity. As mentioned above, a guarantee of payment is contingent upon the insurance company being able to pay. Income taxation, and possibly surrender charges, will be applicable on liquidated earnings. Earnings taken before you reach 59.5-years-old may be subject to at 10% penalty on your federal income taxes.
One last point is that annuity payments that are termed single life stop upon your death. However, this point may be avoided if you opt for the joint and survivor benefit option that will continue payments to your surviving spouse upon your death.