What are annuities? Can they be useful for retirement income?
Are you looking for security and guarantees for your money?
Here are some of the ways to get that: Money Market (MM) and savings accounts, Certificates of Deposit (CDs), U.S. Treasury bills and notes, and certain types of guaranteed annuities.
In this low-interest rate environment MM, CDs and Treasury bills are mostly paying 1% or less. I’ve heard some people refer to CDs as “Certificates of Disappointment.” While you might want to keep some of your money there, many people are now exploring additional options for the guaranteed part of their investments.
Additional choices include a variety of fixed annuities that can offer guarantees and also protect your principal from losses. There are even income products that deliver a lifetime income stream or a fixed period income stream. (6-15 years usually)
What types of fixed annuities are there?
Multi-Year Guaranteed Annuities (MYGA)
MYGAs are a deferred fixed annuity. You put your payment (called a premium) into this vehicle and it grows at a guaranteed rate for the period of time you choose. For example, if you put $10,000 into a 5 year MYGA earning 2.25%, you would normally allow the money to grow over that term, then take it out at the end. Designed for any age person.
Single Premium Immediate Annuity (SPIA)
SPIAs can be good for people past age 65 who are already in retirement. In this annuity, you put in a single payment, then the insurance company starts paying it back to you in an income stream over the period of time you choose. This can be anywhere from 5 years to your lifetime. Attention couples–payments can also be for the lifetime of both husband and wife, providing additional security.
Deferred fixed annuities
There are a wide variety of deferred annuities with various terms, time periods and options. Consult with an experienced insurance agent who is familiar with these products and can customize for your needs.
These are hybrid products that base their growth on a financial index such as the S&P 500, while also including a basic guaranteed “floor” and no losses from market declines. You get potential for some upside gains when the market increases, but are protected from losses if the financial markets decline. Again, there are dozens of different products, so be sure to work with an agent who understands your financial needs. In general, index annuity products require you to leave your money in for some years before taking it out.
Where do the guarantees come from?
Annuity guarantees are not FDIC or federally insured. The guarantees come from the insurance carrier, and are subject to the claims-paying ability of that company. It’s important to purchase annuities from stable and highly-rated insurance carriers. We suggest using companies with ratings of A- or higher.