Don’t gamble with your golden years

Charlotte Real Estate Will you have enough money for retirement? That question may keep you up at night. Or you may avoid thinking about it altogether.

“What scares me for this country, especially for the baby boomer generation, is that many people will have to rely on their investment smarts in managing retirement funds,” says economist Steven Weisbart of the Insurance Information Institute. “Many have no training, or interest, in managing money.”

One possible solution? Annuities – contracts sold by life insurance companies that offer a guaranteed stream of income for those golden years.

Fixed savings annuities, also known as deferred annuities, have guaranteed interest rates and tax-deferred benefits. And immediate income annuities offer guaranteed income for life. Most important, they both promise peace of mind. Both are popular during market downturns. At USAA Life Insurance Co., one of five life insurers that is AAA rated, total annuity sales grew 26 percent from 2008 to 2009. And the company says it anticipates annuity growth will increase as baby boomers get further into retirement.

“Annuities come up in conversation when people are concerned about market turmoil, or when they do a retirement income plan and are worried about running out of money,” says J.J. Montanaro, a certified financial planner practitioner with USAA.

Now more than ever

With a draining Social Security reserve, traditional pensions on the wane, a volatile stock market and homes losing value, retirees should be thinking harder than ever about protecting and growing retirement assets. Longer life spans mean retirees may have to amass more money and preserve it many more years than previous generations.

Having a portion of retirement money in a fixed savings annuity with a fixed interest rate offers certainty in an uncertain investment market, Montanaro says. And using a portion of your savings to buy an income annuity can offer a pension-like stream of monthly payments to help pay your bills. “Whether you’re talking about creating income or building a retirement portfolio, an annuity can work well as a tool in your retirement toolkit,” says Montanaro.

Fighting misperceptions

Weisbart says annuities in general get an unfair rap, often from people who sell competing investment products on commission. But fixed savings annuities and fixed immediate income annuities are fairly straightforward, says Montanaro.  And their fees are very competitive to other retirement products. In some instances, fees can be waived altogether.  You can also name a beneficiary so any money remaining goes to someone you love.

Finally, some point out interest rates on annuities aren’t as high as they were a few years back. But annuities with fixed rates can still be a good deal if you’re looking for a secure place to put your money. “Relative to other safe investments, such as certificates of deposit or treasury bills with even lower rates, they are still attractive,” Montanaro says.

How to choose

Deciding which of these kinds of annuities could benefit you is easy, says Joe Montminy, assistant vice president of the annuity research program at LIMRA. Just ask, “Do you need the money now or later for your retirement needs?”

If you need it now, consider the immediate income annuity. If your retirement is a few years away and you want to increase your assets, go with a fixed savings annuity.

Here’s how each works.

Savings annuity

Savings annuities earn either a fixed rate for a period of time, say five or 10 years, or a flexible rate that changes over time within an established range. All fixed savings annuities have a guaranteed minimum interest rate, the interest is not taxed until you take the money out, and is guaranteed against loss by the insurer.

“Think of the fixed savings annuity as a safe harbor,” Montanaro says. “It can only go in one direction: up.”

Because taxes are deferred, withdrawals before age 59 1/2 could be subject to penalties. But remember the annuity is really for retirement, so you should try not to touch it anyway.

Immediate income annuity

This kind of annuity helps cover basic living expenses in retirement. To find out if you need one, add up monthly, non-negotiable bills — utilities, food, property taxes, etc. If your guaranteed income from Social Security and military or corporate pensions can’t cover the tab, an immediate income annuity can help fill the gap.

You’ll feel secure not having to pay bills with your investment income, which can plunge during market downturns, notes Montminy. Weisbart agrees: “If you have to cancel a vacation because the market’s down, that’s fine. But if you can’t buy medicine or food, that’s a problem.”

Though immediate annuities require a sizable one-time premium, you’ll have the security of knowing essential expenses are covered – immediately. That’s what makes them worth considering. “It’s the insurance factor — the peace of mind — that people are looking for,” says Montminy. “By having that guaranteed payment for life, you know you have some protection on your overall portfolio.”

Experts emphasize that the lump sum you use to buy an income annuity should be just a portion of your retirement assets. You want to diversify your retirement portfolio to also provide liquidity and to protect against inflation.

Bottom line

There are only five life insurers that are AAA rated, so make sure the company you buy from has high marks from the insurance rating agencies. You want to make sure the company is around as you age. And review the fine print on your contract with a financial adviser.

“The goal is to understand what you’re buying and approve the terms,” Weisbart says.



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