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Annuities: Facts you Need to Know

For most people, the biggest financial concern is retirement. An April 2014 Gallup poll found that nearly 60 percent of Americans were moderately to very worried about not having enough money during retirement. The percentage jumped to 70 for Americans between the ages of 30 and 49 and to 68 percent for people between the ages of 50 and 64.

Concerns about retirement may never fully go away. However, if seniors and others are better educated about their options in retirement, the more comfortable they are likely to be with their finances during retirement. One retirement vehicle, annuities, deserves as a closer look because it can be a valuable resource to retirees. This is only true if you fully understand annuities and what you are purchasing.

Longer Lives Mean Higher Costs  

One common question regarding retirement is “why is it such a concern today?” While there are several factors that make retirement more of an issue for today’s and future seniors, one major issue is that people are simply living much longer.

For example, the average life expectancy in US is now over 80-years. Longer lives tend to mean more illnesses, such as cancer, dementia, or chronic conditions, such as diabetes, which push health care costs up high as well as increasing the general cost of living. Healthcare spending makes up about 20 percent of the country’s gross domestic product, according to the Financial Times.

Quite simply, the longer a person lives, the more he or she will need to have in retirement savings. If a person could live on $50,000 per year in retirement, living 15 years would cost three quarters of a million dollars. Living for 20 years in retirement would cost $1 million.

Annuities Are Common, But Less Common Than in Years Past

The longer people live, the more certain they need to be that there will be money to see them through. Annuities are one way to offer guaranteed steady income throughout retirement, yet they seem to be less popular today as an investment option.

A report compiled by the Insured Retirement Institute found that about one third of investors have an annuity tucked away in their retirement portfolio. However, the percentage of people with annuities had fallen between 2012-14. In 2012, more than 40 percent of people who invested in retirements had an annuity. Interestingly enough, the report stated that younger people, members of Generation X and Y who had higher incomes were the most likely to own fixed rate and deferred annuities.

Immediate Annuities Are Up

While annuities on the whole are less popular in 2014 than in 2012, one type of annuity is proving to be more popular. The Insurance Retirement Institute noted that immediate annuities have become increasingly common.

Since 2003, sales of immediate annuities have doubled. The number of sales increased by 20 percent just last year. Immediate, fixed annuities offer a number of advantages that may make them appealing to buyers, particularly to people near or at retirement.

One feature of immediate annuities is the lifetime payout. Another is the survivorship credit, which is likely to become even more attractive as the country continues to recover from the recession and interest rates continue to rise.

Variable and Deferred Annuities are Still a Popular Pick

While immediate, fixed annuities might be appealing, they aren’t the only option, nor are they necessarily the best option. The Insurance Retirement Institute found that more than 90 percent of all annuity sales in 2013 were for deferred annuities. Of those deferred annuities, the majority were variable.

The More People Know, the More Wealth They Tend to Have

Wealthy investors might be more likely to invest in an annuity. However, they are also more likely to do a considerable amount of research before purchasing the annuities. The more money a person has, the more he or she has at stake when it comes to investing.

People of average incomes can use the same criteria as the very wealthy when it comes to purchasing an annuity. People should always look at the financial health of the insurance company before purchasing, to make sure the company will actually be able to pay out the funds for the long haul.

Guaranteed Income Makes Annuities Appealing

There are a number of unknowns when it comes to retirement. Income from retirement accounts can fluctuate as the market goes up and down. However, annuities typically offer a set, guaranteed amount of income every month.

Along with offering a reliable source of income, annuities offer investors the opportunities for growth and tax deferment. Deferred tax payments can be particularly appealing, as a retiree doesn’t have to worry about paying taxes until he or she is actually going to use the money. Finally, many annuities offer investors the ability to pass down some of the investment to their children or heirs, making it an appealing option to the very wealthy and for people of more modest incomes.


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Uncovering Annuities

When you look at the picture of retirement in the US, things can start to look a little bleak. A Gallup poll in 2013 found that younger people were more optimistic than those near retirement age about their ability to live comfortably during their retirement. More than half of 30-49 olds and those in the age of 50-64 believed that they wouldn’t live well when, or if, they retired.1

Much of the insecurity about retirement comes from uncertainty about what sources of income will or will not be available when people decide to quit their jobs. While you might have some familiarity with concepts such as Social Security, 401(k), and IRA savings, and annuities, the full details of each might not be clear to some.

Annuities can be particularly confusing for people of all ages. However, when understood and used correctly, it can be a worthwhile vehicle that makes retirement a bit more comfortable.

Annuities Have Changed Over Time

According to a 2014 survey by The Phoenix Companies and reported on in LifeHealthPro, more than 50 percent of people surveyed were not familiar with annuities. Lack of familiarity can breed contempt in certain cases, as those unaware of what the investment product could offer them can be suspicious of annuities. The survey also found that people were unaware of the many benefits commonly included in today’s annuities.

Annuities offer three main benefits. First, unlike IRA or 401(k) plans, the amount a person can invest in an annuity every year does not have a limit. This means that a person who is behind in retirement savings can quickly catch up in the last few years of his or her career.

The second benefit consists of being able to tax-defer the amounts invested. Until it’s time to start receiving money from the plan, you do not have to pay income tax on the original contribution or on any earnings.

You Have Options

A third benefit of annuities you might be unaware of is that many of them offer a number of options. First, a person can decide to receive payments from the annuity in the form of a lump sum, or in the form of fixed, regular monthly income.

A Gallup poll from May 2013 found that nearly half of all non-retired people planned on relying on the amounts saved in their retirement accounts once they stopped working. 30 percent of all non-retired people were hoping to use Social Security payments as the bulk of their post-retirement income.

No matter what the primary source of income is in retirement, it’s not recommended that people rely on a single stream of revenue. Adding annuities to the mix offers an additional source of income and a bit more security.

Annuities Offer Additional Stability

People who were near or in retirement when the recession struck in 2008 experienced a crude surprise when their retirement portfolios lost a lot of value, seemingly overnight. Despite this, about 50 percent of those surveyed by the Phoenix Companies stated that they were going to depend on the funds in their retirement accounts for monthly income.

An annuity that offers a guaranteed monthly income for the rest of a person’s life can often be a safer and more stable option. For people who are in retirement now and are still relying on the income from their 401(k) or IRA, it is strongly recommended that they speak with a financial professional about the potential benefits of an annuity.

Annuities Could be More Popular

Despite the stability and other benefits offered by certain annuities, they aren’t a terribly popular pick. Just 20 percent of people in the Phoenix Companies survey planned on using annuities. The Gallup poll results revealed that just 9 percent of all non-retired people were considering using annuities as a major source of income in retirement.

In many cases, annuities aren’t as popular as they could because of a lack of information about the products. Retirement advisors or advocates can provide people with additional information on annuities. Doing so would not only provide a new source of income to people in retirement, but also help them learn to choose an annuity carefully, to avoid those that do have high fees, or are high in risk.

Confidence is Key

Confidence is the key to a comfortable retirement. People who are confident that they have made the right choices for their money and that their money will continue to work for them for the rest of their lives are able to enjoy their retirement years without constantly worrying about income. Senior Education Counsel encourages seniors and those nearing retirement to learn more about their options, including the potential for annuities, before they settle down into their retirement years.