Today, Americans nearing or entering retirement are being exposed to a world of uncertainty. To begin with, efforts to contain the COVID-19 pandemic have pummeled markets, stalled economies and hampered investment growth — decreasing nest eggs at an inopportune time for many. Life spans are growing longer as well, forcing people to prepare to meet the financial obligations of a retirement that could last three decades.
With pensions becoming a thing of the past, 80 million Americans actively participate in 401(k) plans.5 The prevalence of these and other defined contribution plans has shifted the picture for many. Despite their tax benefits, they could expose individuals to market risks that can leave them short of retirement income goals.
Annuities can take some of the uncertainty out of the picture. As part of a balanced plan, annuities can offer strategies to help protect investments while still allowing for growth. They can also provide guaranteed, reliable income for life to help cover necessary expenses and create the retirement lifestyle retirees planned for.*
IS RETIREMENT WITHIN REACH?
Americans worry about running out of money and being able to afford a comfortable retirement. Workers have saved an estimated median $50,000 in total household retirement accounts.2 Just 18% of workers are very confident in their ability to retire comfortably.2 Twenty-nine percent of baby boomers do not have access to an employer-sponsored plan, such as a 401(k),2 and only 50% participate in one.2
Rising expenses are compounding matters. A healthy 65-year-old couple can plan on projected lifetime health care costs of nearly $400,000.3
Social Security represents one of the few forms of guaranteed retirement income retirees can rely on, yet many express concerns about its future. In fact, 77% of workers worry Social Security won’t be there for them when they retire.2
Still, workers might not be doing enough to shore up their plans. Only one in five has actually written down a retirement strategy. What’s more, only 25% have a backup plan for retirement income should something happen to them to prevent them from working before they retire.2
“In 2008 the stock market experienced some of the biggest losses in its history. Investors watched as their retirement nest eggs diminished by as much as 37%.1 If you were an investor who was nearing retirement during this crisis, you may have had to continue to work for several more years or adjust your retirement goals significantly in order to retire. However, owning a variable annuity or fixed indexed annuity with an optional living benefit may have helped avoid that dilemma entirely.
“Living benefit riders are guarantees* that allow you to stay invested in the market to take advantage of growth opportunities while [being provided with] a benefit base that guarantees income for life at a certain percentage (5% at age 65 is industry average). So in 2008, if you lost 40% of your account value in the annuity, the guaranteed benefit base would have been unaffected, thus enabling you to receive the guaranteed withdrawals of 5% for life at age 65. Your retirement income would be unaffected by the market downturn and you could move forward without having to make adjustments to your retirement goals.”
— Chris Previti, VP Managing Director, Annuities – Transamerica
THE ROLE OF RETIREMENT INCOME TOOLS
Guaranteed income products, such as fixed index and variable annuities, can take some of the guesswork out of retirement income. Annuities can help workers:
- Supplement Social Security or pension income.
- Receive lifetime guaranteed income.
- Cover essential or even discretionary expenses.
- Accumulate assets for retirement.
- Leave a financial legacy.
Annuities also can offer optional benefits that aren’t available through other retirement savings vehicles. They can provide protection against downturns in the financial markets, the means to protect legacies and families, and additional flexibility and control to better fit an individual’s income needs.
The promise of guaranteed income is appealing. Nearly half of Americans would be willing to convert some of their assets into a guaranteed lifetime income stream.4 Those who already own an annuity may feel they are on firmer financial ground than those who don’t. In fact, 69% of those who own an annuity agree they won’t outlive their savings by age 90, compared with 57% for those who don’t own an annuity.4
UNDERSTANDING FIXED INDEX AND VARIABLE ANNUITIES
Although they share many characteristics, they feature some key differences that could influence individual investment decisions. Here’s a look at both types and the benefits of adding a living benefit.
FIXED INDEX ANNUITIES (FIAs)
The main feature of FIAs is their potential downside protection. Even if financial markets decline, FIAs offer a guaranteed minimum return and guaranteed* payments. That reduces the risk that market movements will interrupt an income stream. The trade-off is a cap on growth that could limit exposure to market upside.
FIAs offer tax-deferred earnings accumulation potential by locking in interest earnings based in part on the positive movement of an index. They earn interest, in part, based on changes in a market index, which measures how the market or part of the market performs. Index growth may be subject to caps, participation rates and spreads.** For instance, an FIA may focus on a broad equity market index, such as the S&P 500®. As the index grows, the policy can periodically lock in that tax-deferred growth. When it falls, the policy maintains its value until markets rise again.
Flexibility is an important component of financial planning, so some FIAs offer withdrawal options that don’t trigger a surrender charge. For example, individuals may make withdrawals up to 10% of their total premium payments.
Variable annuities often offer a wide range of professionally managed investments. Variable annuities are long-term, tax-deferred vehicles designed for retirement purposes and are subject to investment risk, including possible loss of principal.
Variable annuities also offer opportunity to share in potential market gains. The level of income derived from a variable annuity is linked to market performance. Variable annuities allow individuals to take greater advantage of market upside — along with the opportunity for downside protection when combined with an optional living benefit for an additional fee. That helps keep market fluctuations from knocking an owner’s income strategies off track. Like FIAs, variable annuities offer tax-deferred growth, surrender charge-free withdrawal options and optional benefits to provide lifetime income.
For more information to help your clients navigate their financial future with annuities in these trying times visit transamerica.com/forlife today.
1. MorningStar Direct, “S&P 500 Yearly Returns,” 2008.
2. Nonprofit Transamerica Center for Retirement Studies, “19th Annual Transamerica Retirement Survey of Workers,” December 2019.
3. HealthView Services, “Retirement Health Care Costs,” July 2019.
4. LIMRA, “The Facts of Life and Annuities,” 2019.
5. American Benefits Council, “401(k) Fast Facts,” January 2019.
Variable annuities are long-term investments and sold by prospectus. Before investing, you should consider the investment objectives, risks, charges and expenses. This and other important information are contained in the prospectus. Please read it carefully before investing.
The variable annuity policy value, death benefit and other values will fluctuate based on the performance of the investment options and may be worth more or less than the total of all premiums paid when surrendered.
Variable annuity fees and charges include mortality and expense risk fee and administrative charge, surrender charges, annual fee, and investment option management fee. Additional fees may apply to optional benefits selected, including living benefit riders.
Variable annuities are underwritten and distributed by Transamerica Capital Inc., 1801 California St., Suite 5200, Denver, CO 80202, FINRA member. Transamerica annuities are issued by Transamerica Life Insurance Company, Cedar Rapids, Iowa and Transamerica Financial Life Insurance Company, Harrison NY.
*All guarantees, including optional benefits, are based on the claims-paying ability of the insurance company issuing the annuity. Withdrawals of taxable amounts are subject to ordinary income tax and may be subject to a 10% additional federal tax if withdrawn before age 59 1/2.
**A FIXED INDEX ANNUITY IS NOT A SECURITY and fixed index annuity policies are not an investment in the stock market or in the indexes. Index account interest is based, in part, on index performance.
Past performance of an index is not an indication of future index performance. There is no guarantee that the index interest rate will be greater than zero percent. There is no guarantee that the Company will declare an interest rate greater than the guaranteed minimum effective interest rate.