While collecting the latest trends and tips about stocks, bonds and big funds might grow your wealth, investors who want a long-term solution for maintaining secure retirement income often turn a simpler answer – annuities. The addition of this asset to your portfolio functions as a hybrid investment and insurance tool.
Depending on your future goals, annuities can help you provide for your family over a long period of time. You can anchor your retirement portfolio with stable, tax-deferred payments that annuities provide.
How Annuities Work
Today’s retirement environment looks different than those of previous generations. Insurance and investment industries are taking notice, changing their product offerings to meet the needs of people who are working later in life and living longer.
Adapting to the modern financial climate may require that you rebalance your portfolio and evaluate newer options as you prepare for your golden years.
Annuities aren’t new, but their draw is that they can provide a stable element in a portfolio that may have unproven investments or ones that carry more volatility or risk. They are an ideal tool for guaranteed savings.
You can purchase them with one premium payment or series of premiums. In return, you receive a stream of income payments that start on a date chosen by you and the contract issuer. The IRS allows you to defer taxes for these payments until the time distributions begin.
Brokerages, insurers and mutual fund companies sell annuities. They structure them in a variety of ways, tailoring contract stipulations based on when annuitants need payments. They offer immediate annuities (which provide money within a year of purchase) and deferred annuities (which provide payouts later in life).
Other available features:
- Interest adjustments
- Protections for spouses and beneficiaries receiving payments
- Income for long-term care
- The ability to add other riders to your mutually negotiated contract
What Not to Expect from Annuities
Before rushing through and signing an annuity contract, make sure you understand what you’re getting into and how this tool fits with the resources you already have.
Some bells and whistles that come with some annuity contracts can be costly. Investors should beware of too much customization and spending money on features that may not pay off in the end. The most vanilla annuities with basic guarantees often provide enough portfolio security and won’t weigh down your portfolio with the cost of added riders.
Another expense to be cautious about is the managing fees that go to the companies issuing annuities. Some contracts require high annual fees, reducing the overall value of your annuity. While these costs will be disclosed to you up front, they may be buried in a long and complicated contract where it is easy to miss.
Some investors have the misconception that annuities are primarily a growth tool. Growth is not the defining characteristic. Many other investments have far greater potential for significant interest and value earnings.
While annuities can grow over time, any growth is incremental. What annuities offer is their guarantee – the money will be there when the contact says it must be there. They add a conservative element to your portfolio.
Balancing Your Portfolios with Annuities
Creating a secure portfolio is a balancing act, demanding the right mix of assets that account for market risk, growth, savings protection, taxes and the time you have until retirement begins. Annuities play the specific role of protecting your principal, giving an anchor to your portfolio and offsetting losses, as well as delaying taxes.
Financial experts urge investors to pay attention to the tax risk of portfolio earnings. By purchasing annuities, you can defer taxes until distribution time and grow interest earnings without penalties.
The Treasury Department also changed tax rules which now allow people to roll over savings from retirement accounts into qualified longevity annuity contracts (QLACs). These allow you to reduce your required minimum distributions and delay annuity payments until a later date.
You can choose lifetime or longevity annuities, designed to provide payments lasting through the whole of retirement. The tools come with guarantees, ensuring that your money is protected and you have reliable future payments. This adds an insurance element to your portfolio, allowing you to hedge against the market losses from your other investments.
By purchasing fixed annuities, you receive payments that remain the same, similar to the guarantees offered by CDs and bank money market accounts. With indexed annuities, your payments can gain or lose value, but the risk is minimal compared to stock fluctuations.
Learning how best to leverage your resources for retirement requires taking a step back and looking at the big picture of present and future needs. For some investors, buying an annuity will be the key to ensuring a fraction of their portfolio is dedicated to meeting long-term needs.
This post was written by Alanna Ritchie. Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for annuity.org, where her primary focus is personal wealth management.