Desire for safety and fear of markets’ relapse incent retirees to add annuities to their portfolios
Investors in or considering retirement are increasingly adding fixed index annuities to the traditional presence of equities and bonds in their retirement portfolios. Fixed index annuities offer lifetime income opportunities that are attractive to both spouses seeking safety during times of limited financial security.
The universal appeal of upside gains, loss protection and lifetime income fueled a 33% rise in fixed annuity sales from 2012 – 2014, while sales of variable annuities fell 5% during the same period, according to figures from LIMRA Secured Retirement Institute. Overall, 2014 annuity sales were $235 billion, with 60% for traditional variable annuities and 40% for fixed annuities, which surged in growth.
Retirees, and Baby Boomers planning to join them, are highly sensitive to the volatility of the stock market. They’re fearful of another 2008-like hit, so much so that many are turning to annuities backed by insurance companies to complement retirement assets steeped in traditional equities – whose value vibrates with volatility – and fixed income tools like bonds and CD’s, that presently add virtually no growth.
Fixed index annuities are tied to a variety of indexes, led by the S&P 500, and include the Dow Jones, Russell 2000, Euro 500 and more, all of which provide ample diversification. While these annuities can produce gains in the form of contract credits over time as the result of changes to the specified index, the risk is born by the issuing insurance company, which is largely perceived as safer than the markets in general. Among the more popular attributes of fixed income annuities is their stability when the contingent index declines, hence the protection of principal.
Proponents are quick to cite several full-disclosure aspects of fixed index annuities:
• Contract credits during gain years do not include dividends
• Participation in the gain may be less than 100% of the gain
• Contracts in non-qualified plans carry tax deferral
• Cap rates limit the gain, even in instances of superior index results
• Annuities can be held in qualified and non-qualified plans, with only gains taxed
Most attractive of all may be an annuity rider that can pay a monthly, quarterly or annual distribution to the annuitant, or contract holder, beginning at a specified age. For someone at age 70, the annuitant might withdraw 6.5% of the contract through death, even if the distributions have exhausted the accumulated value at the inception of distributions. Such distributions can benefit both spouses, and the burden lies on the consumer investor to understand all aspects of a proposed annuity before any purchase.
Syndicated financial columnist Steve Savant interviews top retirement specialists in their field of expertise. In this segment we’re talking to retirement consultant Lee Davis. Right in the Money is a financial talk show distributed in daily video press releases to over 280 media outlets and social media networks.