Annuities: Offering Protection In A COVID-Crazy World
By Ryan Skinner
Will I run out of money? Do I run the risk of losing my savings due to outside factors? It is no secret that these are two of the main questions facing those approaching or considering retirement, even more so considering the COVID-19 pandemic.
These uncertain times and the worldwide financial impact have many people searching for a retirement strategy that will provide answers to those questions.
Annuities may be the answer to retirees’ worries and offer the best way to build financial security for their future. They offer extra protection during hard times and a reliable income stream that's impossible to outlive.
Savings Are Protected
Annuities are certainly a hot topic, as 2019 was their best year for sales since 2008. Experts believe demand for annuities will resemble the demand following the last financial crisis. Additionally, many fixed indexed products and other newer annuity structures didn't even exist back then but are now considered extremely attractive options.
Annuities linked to stock indexes such as the S&P 500 are well-suited for today’s environment because they help shield your savings from outside factors. Annuities’ growth potential, and the limits on losses that many include, make for a less risky vehicle. This can surely provide peace of mind to those worried about the security of their retirement plans.
The Annuity Advantage
Advisors often consider the five years before and after a client’s retirement date as the most vulnerable time for the client’s nest egg. A variety of outside factors during that critical time, combined with a need to make withdrawals for income, could quickly deplete your client’s portfolio. Running out of money is another significant and valid worry for retirees.
Today’s annuity products offer continued tax-deferred growth along with a guaranteed income throughout retirement, regardless of what the market does. Even if the market declines, your client’s balance won't. However, along with limiting losses, the products cap the returns your client can receive. Nonetheless, they still offer higher returns than many fixed-rate or low-risk investment options.
Fixed annuity accounts typically offer payouts of between 2.30% and 2.85%. Results for fixed indexed annuities are normally twice that. Rates vary, but the value of income accounts often grows at an annual compounded rate of 4% to 7%.
An additional plus to annuities is the death benefit. Income payments or the total value can be passed to your client’s beneficiaries.
Realistic Distribution Plans
Investment advisors regularly ask clients how much risk they can tolerate. The answers are vastly different in good times than in bad ones. Retirees need to develop a realistic picture of their expenses for the foreseeable future.
When you and your client review their retirement budget and assets, such as Social Security, your client must consider what they can afford to draw regularly from their retirement savings. The difficulty many retirees face is that they assume they'll live on a specific amount for a certain number of years, earning continued returns, and they set an unsustainable amount to withdraw from their portfolio each month.
A well-designed annuity eliminates the guesswork and fear of dwindling assets. It incorporates protection planning and cash flow management. It establishes a consistently reliable payout amount determined by the account value, the age when distributions start, and gender.
Additionally, annuities with lifetime income riders can be a worthwhile purchase for some people. They can offer guaranteed growth rates and produce lifetime income that can be adjusted upward at a future date. However, they typically cost 1% of returns.
Current Economic Reality
The COVID-19 pandemic will impact our lives for years to come, through economic effects, workplace changes, travel, shopping and even social interaction. Its second wave is likely to continue to affect all aspects of life.
For those approaching retirement, the current situation could impact their lifestyle for decades. When it comes to accumulating assets and preserving them to enable a retirement income that will support clients throughout your golden years, advise them on the ways an annuity can mitigate their concerns.
Ryan Skinner is founder and owner of Summit Financial Partners and author of Taking Stock: Protect Your Wealth and Create Reliable Income for a Happy and Secure Retirement. Ryan may be contacted at [email protected].