Annuities Now Give You Better Options for Both Income and Growth
The annuity options available to investors today seem light years ahead of what was available just 5-10 years ago. As annuities are transformed into more favorable retirement planning investments, I thought it would be a good time to review some important enhancements that could benefit you. Realizing the thirst investors have for both income and growth, insurance companies have now added features to the traditional deferred fixed annuity to enable it to grow along with the rise in the stock market. It's called a fixed index annuity.
For example, a traditional fixed annuity today for 5 years will earn you about 5% guaranteed for each year. The new fixed index annuity may guarantee you a lower minimum guarantee of 3% during the contracts life, and you can opt for getting credits added to your account equal to the stock market's rise each year, subject to a maximum cap. Simply put, your retirement savings can get a minimum guaranteed fixed rate, while the potential exists to earn double or triple that if the stock market appreciates. The obvious question I get asked a lot is: What happens if the stock market goes down? Aha! In that case, your account value would stay the same, but the guaranteed 3% per year would apply. The good news is, you are guaranteed no losses in your account year to year or at the end of the annuity term.
For an easy example, assume $50,000 is invested in the annuity one year ago when the S&P 500 was 1280, the index most often used to determine your credits. Now it's at 1435, or 12% higher. If the cap is set at 9%, you get 9% of $50,000 or $4,500 added to your account. Now you start year two at $54,500 and reset the S&P 500 Index at 1435 for year two. If the S&P 500 falls 40% in year two, (as it did in the 2000-2002 downturn), your credit is zero and your guaranteed rate of 3% applies. The S&P 500 will reset each year to measure the next 12 months.
The real important analysis that you need to consider is: what are the odds that the stock market will outperform the 5% guaranteed fixed annuity rate over time? Given the stock market's long history of going up an average of 10% per year and it posting positive returns 70% of the time, that's a bet I'll take. U.S. Treasury bills and intermediate-term bonds have beaten the S&P 500 just 10% of the time over the past 80 years.
Insurance companies in general have also shortened the lengths of these annuity contracts. The average term is 6-7 years with a few offering 4-year plans. Starting deposits are in the $10,000 to $15,000 area. Virtually all deferred annuities allow withdrawals of 10% of your account annually, or you can set up a schedule with them depending on your income needs. I recommend an analysis of your retirement plans and your tax situation before buying any annuity. Remember, they are longer term retirement savings vehicles, similar to 401k pland, and are subject to taxes and penalties if surrendered early. Annuities can offer guarantees - something few other investments with this flexibility can give you.
Please give me a call if I can be of more assistance on this topic or to schedule a review.
Retirement Planning Counselor
Thursday, January 25, 2007
Better Annuity Options for Retirement
Posted by Barry Unterbrink at 1/25/2007 08:39:00 AM
Barry Unterbrink is a fee-based Chartered Retirement Planning Counselor and wealth manager. He and his father, Larry Unterbrink, have experience as portfolio managers for institutional pension funds totaling $100 million, Investment Advisory Presidents and financial newsletter publishers. See http://www.stetsonwealthmanagement.com for more information.