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Understanding Annuities: Do They Provide Security in Retirement?

Understanding Annuities: Do They Provide Security in Retirement?

The thought of running out of money during retirement is alarming!  Annuities offer the potential to lower this risk.

An annuity is an insurance or investment product that guarantees you a series of regular disbursements, usually over your entire lifetime. They vary in types with options available that provide payments instantly vs starting sometime in the future; for you alone vs for your spouse as well; for a set period of time vs for your lifetime; with fixed benefits vs variable benefits; and purchased with a single lump-sum premium vs ongoing payments.

It doesn’t come cheaply and requires careful scrutiny but can serve as a valuable component of your overall retirement plan. The top benefit is peace of mind, with annuity policies guaranteeing a set monthly income during retirement. In fact, according to a recent study, “those receiving income from an annuity have the highest satisfaction levels of all investment types.”

Annuities also protect investors from the following investment risks:

  1. Longer than expected lifespans. The Social Security Administration reports that a “About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.” The agency is experiencing a funding crisis, with full payment for future retirees in limbo. Mushrooming lifespans has also caused many companies to eliminate pension plans, further eroding retirees’ safety net. In this climate, annuities offer a secure protection from seniors’ greatest fear, which is to outlive their savings.
  2. Market fluctuations. With retirement nowadays typically lasting two to three decades, sharp market dips are virtually inevitable and can disrupt your retirement. Annuities can protect you from such expected situations.
  3. Sequence of return. During retirement, you will need to draw on funds for living expenses. But if the market is in the midst of a downturn at that same time, the withdrawals you make for living expenses will simultaneously mean you have less money left over to invest and profit from when the market recovers. This sequence of risk can devastate your portfolio. Certain types of annuities pay you based on your contract regardless of the market’s position, protecting you if your retirement occurs during an economic downturn.
  4. Impulsive reactions to market changes. Investors frequently panic during bear markets. While the reaction is understandable, it can derail a retirement plan and cause serious loss from profits gained during future recoveries. Since annuities provide steady, ongoing benefits, investors may be less likely to react impulsively and sell valuable investments when the markets become volatile. The security of the annuity provides just enough cushion to help investors tolerate nerve-wracking market gyrations.

Annuities can be expensive, but their benefits merit consideration as part of a comprehensive retirement plan. Other considerations include tax consequences of different policies as your income bracket will likely change during retirement. And you should also examine the options for passing the benefits onto your heirs. Annuity inheritances do not need probate approval, and they generally offer beneficiaries options to receive benefits and possibly defer taxes over time.

At Silverman Financial, our goal is to help you create a diversified retirement plan that incorporate the best investment products and services to suit your individual needs.

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