How Annuities Offer Protection and Growth Potential
National Annuity Awareness Month is upon us! Let’s go over how annuities can be an important part of a retirement plan.
June is National Annuity Awareness Month, giving us the perfect reason to discuss how they can positively impact your retirement. Annuities have always played a role in retirement planning, but with growing uncertainty and market volatility, their importance has boomed. They offer the chance for growth along with the protection of principal during market downturns which is guaranteed by the claims-paying ability of the issuing insurance carrier.
While they can be a vital part of the retirement-planning process, annuities can sometimes be overlooked by advisors who focus strictly on accumulation and stock market investments. For people getting close to retirement and those without the appetite or flexibility for stock market risk, annuities can be an attractive option to guarantee income for life.
In fact, annuities were created for retirement; they were first invented during ancient Roman times to compensate retired soldiers. They’re meant to help you generate income once you stop collecting wages. There are many different types of annuities, but fixed and fixed indexed annuities are different than retirement accounts like 401(k)s and IRAs in that they are not subject to market risk, and they offer guarantees.
In other words, fixed and fixed indexed annuities can offer a guaranteed income stream to eliminate some of the uncertainty that comes with retiring. It’s important to understand fixed and fixed indexed annuities are not investments, they are contracts. Even though they may credit interest based on market gains, they are not actually invested in the market at all. Fixed and fixed indexed annuities are contracts between you and the issuing insurance company, who again, based on their claims-paying ability, guarantee your principal and sometimes offer participation in stock market upside.
One of the main concerns of Americans on their way into their golden years is funding a secure retirement. In fact, a recent study showed that 56% were worried about running out of money in the next stage of their lives [1]. That worry seems to be well-founded, as a 2019 study projected that over 40% of U.S. households will run out of money in retirement [2].
One of the biggest reasons retirees run out of money is sequence of returns risk. This can happen when clients withdraw money from accounts early in retirement in a down market. The withdrawals can then out-pace the growth of the account, making it more likely that a person completely drains their funds while still living.
A fixed indexed annuity can counter sequence of returns risk by providing a guaranteed lifetime income option. Under a properly-structured fixed indexed annuity, the principal and the lifetime income benefit are both protected, which can be beneficial in a market crash. They also offer flexibility in diversifying your portfolio, as retirees with a guaranteed lifetime income benefit can keep other assets invested in the market, conceivably giving them a chance to wait out valleys and plateaus.
Some annuities are even designed to help combat inflation by offering a COLA, or cost of living adjustment. Considering the 2021 inflation rate was the highest America has seen since 1981[3], it’s no wonder experts are expecting an increase in inflation-protected annuities [4].
While annuities are popular among those looking for protection as well as growth potential, purchasing one can be treacherous without proper help. There are many different types of annuities, and they won’t all offer identical benefits or protections. For example, variable annuities are directly invested in the market and carry the same risk that any market investment would. There are pros and cons to each type, and innovative insurance companies are working to design new annuity products with enhanced benefits every single day.
If you have any questions about annuities or how to protect your retirement funds, please give us a call! You can reach GA Investment Management in Pennsylvania at 724.353.1800.
Sources:
- https://www.nirsonline.org/wp-content/uploads/2021/02/FINAL-Retirement-Insecurity-2021-.pdf
- https://www.ebri.org/content/retirement-savings-shortfalls-evidence-from-ebri-s-2019-retirement-security-projection-model
- https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093
- https://ifamagazine.com/article/inflation-could-lead-to-a-resurgence-in-popularity-of-annuities-says-continuum/
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.
Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA GA Investment Management (“GAIM”).
Insurance is offered through Gierl Augustine & Associates, LLC. Our IARs are also independently licensed insurance agents. When acting in this capacity, agents receive commissions for selling insurance and annuity products. The receipt of compensation and other incentive benefits affects the judgment of the agent when recommending insurance products to clients. Clients should be aware that the receipt of commissions and additional compensation itself creates a conflict of interest. Any references to protection benefits or steady and reliable income streams on this website refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by insurance company. Annuities are not FDIC insured.
