Have you ever been to the beach and been mesmerized by the rhythm of the waves?
I was there recently, and while taking a long walk on the beach, something occurred to me. What people really want when they reach retirement is to have income that’s as regular as the waves–no worries about losses, or running out of money.
Social Security was designed to provide some of that steady and reliable cash flow.
The income you get is related to the premium dollars you put in, the current interest rate, your age, and the contract the insurance company is able to offer you.
Recently, the GAO (U.S.Govt. Accountability Office) even jumped into the secure income discussion by recommending more people entering retirement buy fixed lifetime annuities with their employer retirement plan money or IRAs.
Why? Too many people don’t understand investing or safe withdrawal rates, and are subject to losses or running out of money. This could throw people into the already-challenged government welfare system. So the state and federal governments have a vested interest in seeing Americans survive retirement with enough money.
MarketWatch (of the Wall Street Journal) talks about this government annuity recommendation at the link that follows.
Are you wondering if fixed annuities could help extend your money? First, be sure you understand the difference between the varieties of annuities.
Annuities come in 2 basic types: fixed and variable.
Variable annuities usually follow the ups and downs of the investment markets (they vary), and you are responsible for accepting the investing risk, including any losses. Variable annuities are mostly used for accumulating/growing money in the younger and middle years, when you can take on more risk and have a chance to recover from possible investment losses. They are registered investment products sold by brokerage houses and registered financial advisors. Not surprisingly, variable annuity fees tend to be higher than other annuities.
Fixed annuities, on the other hand, are mostly designed for the income payout phase, when you are close to, or in retirement. These fixed annuities are contracts between you and an insurance company, who promises to pay you income for a certain period or certain amount–even for life– in exchange for a premium payment. Fixed annuities are sold by licensed insurance agents or directly from insurance companies.
The insurance company takes on the risk in most fixed annuities, as opposed to you assuming the investment risk. Returns will often be smaller and more limited in exchange for this promise of an income stream and guarantees.
Remember, fixed annuities are mostly for safe income distribution, not for growth. You will still want to keep some money growing for your later years, to offset inflation.
Insurance company guarantees are not backed up by FDIC. Their guarantees are subject to the insurance company being able to pay its claims, so it’s important to deal with large and stable companies with top ratings from independent rating companies such as A.M. Best and Standard and Poor’s.
So what makes fixed annuities safe? Insurance companies have their own legal reserve system. They have to hold a dollar in reserve for each dollar they issue into a guaranteed contract. By law, insurance companies also have to hold their reserve money in conservative investments like high grade corporate and govt. bonds.
Insurance companies are also backed up by multiple “re-insurers”– large companies that specialize in insuring the insurers against catastrophic losses.
If an insurance company becomes insolvent, it is often (not always) taken over by the state and may be sold to another insurance company who honors the contractual guarantees, just as we saw weak banks being taken over by stronger banks in 2008-10. Insurance companies have a long history of contractual guarantees they have honored.
If you’re concerned about whether your retirement money will last, and if you are age 55+, consider putting a portion of it into a fixed annuity.
To find out if these products are suitable for you, contact an insurance agent in your state who specializes in annuities. Ask lots of questions before you buy, as these contracts are long-term and there can be penalties or surrender charges for taking your money out early.
Could you really have income that’s as regular as the waves on the beach? That dream could be a reality with good planning and wise money placement.