Published in the May 30 – June 12, 2018 issue of Gilroy Life
By Brian Harrigan and Bob Price
Longevity is a growing concern for many of our clients as they continue down the road to retirement. Planning for the unexpected can be one of the most difficult tasks of financial planning and many are concerned about the risk associated with longevity as it relates to retirement savings. Of course, there are multiple ways to address those concerns, but choosing the right one can be a daunting task, especially if you’re not sure who to trust.
Given the growing increase we’ve seen lately regarding annuities, we thought we’d use this column to help explain why this vehicle can be helpful for a portion of a person’s portfolio. We also want you to be aware of some of the pitfalls we see in this type of financial planning vehicle.
An annuity is an insurance product that can help address concerns with longevity by providing a continuous stream of income in retirement (after age 59½).
Annuities can have a single premium or multiple depending on the product. Some annuities provide an income stream immediately while others are structured for tax deferred growth before taking income. For client’s seeking growth that is protected from the market with earning potential better than certificates of deposit or money market accounts, an annuity can be suitable for a portion of your portfolio. One question that should be carefully considered when looking at an annuity is: “Do I need income now or in the future?”
Determining when you need the income can sometimes be tough given the challenges life presents us.
We advise that each individual looks at how they have their portfolio allocated to reduce the chance of major market losses like many people experienced in 2000 and 2008. By safeguarding some of your money in different buckets with varying levels of risk and taxation, one can help ensure retirement monies are not outlived.
Many annuities offered provide both accumulation and lifetime income account options which offer payments you cannot outlive. Given that longevity is a concern for many, a product like an annuity can make sense by providing an income stream to meet costs of basic living needs.
The problem we see with many of these products are often the way expectations are set and the advisors selling them not looking at the big picture.
Most annuities we deal with are indexed. Depending on your risk tolerance and needs, you may also look at variable or fixed annuities options. The indexed annuities growth is determined by an equity index such as the S&P 500 or other indices managed by the carrier or financial institutions.
The most common crediting methods are measured monthly or annually. Insurance carriers cap what you can earn or a credit gains using a participation percentage to determine your earnings.
One can generally expect 3 to 5 percent returns over time in the policy’s accumulation account. The lifetime income account generally provides better crediting guarantees ( often 6 to 7 percent) or opportunities for growth because you have to leave the balance with the carrier you bought the policy from once this rider is elected. Many annuities in the marketplace do not offer a growing lifetime income to address inflation concerns and the lifetime income account balance often cannot transfer to your loved ones at your death (often only the accumulation value transfers). It is not uncommon to see a significant difference between these account values but there are annuities built to address these concerns.
When considering annuities, look at contracts that address protected growth, offer a growing lifetime income, and consider the ramifications of wealth transfer features to heirs. Some annuities have bad press for a reason and those products we choose to avoid. Other annuities can help put to rest the concerns related to market risk and longevity while providing you flexibility needed in retirement.
Brian Harrigan and Bob Price own Executive Plan Design. For more information on how annuities can help address your planning needs, contact them at (408) 767-2572.
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