Many Americans worry about running out of money in retirement -- or not having enough savings to maintain the lifestyle they have planned. In addition to Social Security benefits and pensions, annuities are one of the few retirement options that can provide guaranteed income for your lifetime.
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“It can serve as longevity insurance—a hedge against the financial risk of living to a very old age,” says annuity expert Ken Nuss, CEO of AnnuityAdvantage.
Should annuities be included in your retirement plan? Nuss discussed with Fox Business what you need to know.
Boomer: What risk is there for losing money with an annuity?
Nuss: With any type of fixed annuity, extremely low risk. All fixed annuities guarantee your principal. Fixed annuities are guaranteed by life insurance companies, which are strictly regulated by the states to ensure solvency.
In the highly unlikely event of the insurer’s insolvency, you are also protected by state guaranty associations up to certain limits that vary by your state of residence. There are penalties for canceling the contract before maturity – but most fixed annuities permit partial withdrawals.
Variable annuities are different. Like mutual funds, their value will fluctuate with the stock and bond markets. You can lose money with a variable annuity, especially if you choose the more volatile funds within one.
Boomer: What is the biggest mistake people make when buying an annuity?
Nuss: Not making sure that it’s the right choice to start with. Not shopping around – only looking at one insurer’s offerings.
Boomer: If I have $100,000 to invest, what can I expect an annuity to pay out?
Nuss: It depends on the type of annuity, but for example, a five-year fixed-rate annuity (a so-called CD-type annuity) now pays up to 4 percent, or $4,000 a year the first year. Assuming your reinvest the interest, as you should, in year two it will pay 4 percent interest on $104,000 and so on.
At the end of five years, you can roll the amount over into a new annuity and continue to defer taxes. Or you may annuitize the contract or roll it over to a deferred income annuity or immediate annuity to create a stream of guaranteed lifetime income.
The amount of income will depend on your age, the insurer and policy features.
Boomer: When considering whether annuities are right for my retirement plan, what questions should I be asking myself -- and the plan admins?
Nuss: Begin with these questions:
No. 1: How much income will you need in addition to what you will receive from Social Security and your pension (if applicable)?
No. 2: Will you need supplemental income for anyone else in addition to yourself?
No. 3: How long do you plan on leaving money in the annuity? (Keep in mind that annuities are long-term commitments).
No. 4: When do you plan on needing the annuity's income payments?
No. 5: Will you be able to gain access to the funds from the annuity if you should need them?
No. 6: Do you want a guaranteed interest rate with a fixed annuity and little to no risk of losing the principal, or are you willing to risk losing principal for the chance of higher earnings that are not guaranteed?
No. 7: Do you have enough cash reserves to meet expected needs?