Annuities a Puzzle to Most Boomers
Earlier this month TIAA-CREF released their second annual “Lifetime Income” study which revealed that many Americans are generally interested in a guaranteed monthly income stream but are unfamiliar with annuities which could support their lifetime income options. "For many Americans, annuities are often unknown or misunderstood, which is unfortunate since they are the only way to generate retirement income that cannot be outlived," said Ed Van Dolsen, president, Retirement and Individual Financial Services at TIAA-CREF. 84 percent of the respondents claim that receiving a monthly paycheck during retirement is important to them; yet only 14 percent of Americans have purchased an annuity.
Sean Wilson, a Wealth Management Adviser at TIAA-CREF discussed annuities with me and how they can help retirees to achieve their lifetime income goals. Here is what Sean had to offer:
Boomer: What are the different types of annuities?
Wilson: When you invest in an annuity you can choose to allocate your money in:
- Guaranteed investments. Your investment dollars will accumulate at a guaranteed interest rate. If you’re not comfortable with market volatility and its potential to impact your savings or income, this could be the choice for you.
- Variable investments. Your investment will accumulate based on the performance of the variable funds you select. If you would like the potential for higher returns on your investment and are comfortable with risk, you may consider this choice. Of course, there are risks associated with investing in variable products, including loss of principal.
In fixed or guaranteed annuities, the funds are invested in the insurance company’s general account, which typically contains fixed-income securities, such as bonds. The issuer, not the contract owner, assumes all investment risk. Fixed annuities offer a guaranteed payment, with the payout amount based on the assumed future returns of the investments and the annuitant’s life expectancy. The payment can be fixed for life or can allow for future increases.
Variable annuities provide the contract owner with the ability to invest in both fixed-income and stock-based accounts whose values change depending on the performance of these underlying investments. While variable annuities offer the potential for higher long-term returns than fixed annuities, generally their payouts will fluctuate (sometimes dramatically) from year to year. Unlike with a fixed annuity, the contract owner of a variable annuity assumes all investment risk.
When planning your financial future, one of your biggest concerns is “longevity risk,” or the risk of being unable to fund your retirement if you live much longer than expected. Consider a product that offers one of the best ways to finance a long-life expectancy — the life annuity.
While variable annuities are often criticized for having high fees (a criticism of some fixed annuities as well), being difficult to understand and lacking flexibility on receiving income in retirement, life annuities offer one advantage that other investment options do not — a guaranteed stream of income that will last as long as you live. (Note that these guarantees are based upon the issuing company’s claims-paying ability.)
A variable annuity that provides a range of investment options among various asset classes, has relatively low costs and includes product features that are well-suited to your needs can play an important role in helping you fund your retirement.
Boomer: What investment and payout options do annuities have?
Wilson: Clients can take lump sum withdrawals starting at age 59½. They can also take systematic scheduled withdrawals, a distribution starting at age 59 ½ penalty-free, or can choose to annuitize the contract and take a payment over their lifetime.
Boomer: What are the advantages and the disadvantages of annuities? Are there tax benefits to annuities?
Wilson: A deferred annuity gives you the potential to accumulate tax-deferred funds over time, before you begin to receive payments. Because your money isn’t taxed until it’s withdrawn, it has the potential to accumulate more quickly. When you do withdraw your money — beginning as early as age 59½ — you only pay taxes on the amount your investment may have earned above your principal.
Also, some annuities have riders which can offer a guaranteed minimum death benefit, a guaranteed minimum income benefit or a minimum withdrawal benefit. Some annuities offer other riders that might appeal to certain clients. The downside is that they come with fees and a client may not benefit from adding these riders.
Boomer: Do all annuities have high fees?
Wilson: No. Low expenses help put more of your money to work for you and doing what matters most: Helping you to achieve financial well-being in retirement. The annuity products offered by TIAA-CREF Life Insurance Company offer some of the lowest fees and expenses in the industry.
Of note, there may be a surrender charge (an early redemption fee charged by the annuity company) associated with an annuity, so it is important to understand the terms of the annuity contract.
Boomer: What if I decide to withdraw the money?
Wilson: Annuities are tax-deferred investments and you can make withdrawals penalty-free after 59 ½, however you will pay taxes on the gains.
It is important to speak with a professional to determine the best strategy for withdrawing money from an annuity.