Look for annuities there, fees, and how to structure payments
With the Federal Reserve’s interest rate hike, the annuity seems like an attractive retirement income strategy. After all, higher interest rates mean guaranteed income will be fatter. But there are some considerations that savers have to make first.
The central bank raised the federal funds target rate by three-quarters of a percentage point to a range of 1.5 percent to 1.75 percent — the biggest increase in nearly 30 years. It also said it plans to raise rates to around 3.4 percent by the end of the year and nearly 4 percent by the end of 2023, before expected to cut rates next year.
With news of rising interest rates, as well as soaring inflation and a plummeting 401 (k) balance, retirement savers may wonder where to divert to ensure the safety of their future retirement. One option: Annuities, which are insurance products that provide retirees with a guaranteed income.
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Investors focused on pension funds may see annuities as a gift from the stock and bond markets that have been crushed as inflation rises to 9%.
Over the years, Annuities have had a bad reputation, in part because they are insurance products and there has been a loss of trust in the sales process. Investors also need to understand the fees and regulations that come with the products they are considering for their own retirement path.
First, know the type of annuity you are buying (or are touting): an annuity with a fixed income, which provides a certain amount on a scheduled basis; variable annuities, linked to the portfolio; and the annuity pays immediately with a sum of money.
Also understand how economic factors can affect your retirement income from an annuity. For example, a fixed payment offer may not be good when inflation is rising, as purchasing power will decrease as daily spending becomes more expensive, said Eric Nelson, a certified financial planner and founder of Independence Wealth.
David Stone, managing director at RetireOne, an insurance and annuity firm that works with financial experts, said the Fed’s rate hikes resulted in higher interest rates for fixed annuities and higher ceiling rates for fixed-index annuities. (The ceiling rate is the growth limit of an indexed annuity.) “In the last 12-15 years, this rate has been so low that people have eliminated their fields,” he said. This is the first time in a long time that there have been high interest rates every year.”
Byrke Sestok, a certified financial planner and president of Rightirement Wealth, said, works with a financial planner, especially someone who plays a fiduciary role and is in the best interests of clients.
Because there are so many types of annuities and come from many different suppliers, the journey to find the right one can feel overwhelming or complicated. The wrong choice can cause investors to lose money and put too much stress on them.
When choosing an annuity, investors should ask themselves two questions: how much and in what way they want to receive money from these products, such as monthly or annually, and how they plan to fund the annuity.
Some retirees may only prefer to put a portion of their retirement assets into an annuity — just enough so that the payment is equivalent to their monthly fixed expenses. In such a situation, retirees may choose to fund “additional funds” (emergency funds, trips, unexpected expenses, or new interests) with other sources of income, such as Social Security or a 401 (k) withdrawal.
Advisers warn that, even with the option of investing in annuities, these products should not be considered a last resort vehicle for retirement income. The stock market downturn may have pushed retirement account balances to uncomfortable lows for some investors, but it “also indicates significant buying opportunities in the coming months,” Sestok said. Investors may have to wait between three and seven years for a fixed annuity investment period, meaning that the available assets that will grow according to the market will not be available. “Potential performance can be enhanced as the money invested closer to the bottom of the market,” Sestok said.
Retirement income planning involves a variety of factors, including retirement accounts, pensions if any, annuities, Social Security, and any other cash flow that retirees can expect in old age. “Annuities are like cereals, they’re just part of a healthy portfolio,” said Wheeler Pulliam, a certified financial planner and founder of Xponify Financial. Be wary of positioning them as just a lucrative investment.”
Instead, see annuities as a way to secure a portion of your overall retirement income, Pulliam says. And aim to invest no more than 20% to 40% of the total portfolio in an annuity, he added. “If you follow those principles instead of pursuing rising rates, then your portfolio will thank you.”