Market Participation and Downside Protection
Indexed annuities can be powerful investment vehicles because of their ability to grow on a tax deferred basis, as well as the potential guarantee of a lifetime income stream regardless of how long you live. Annuities are also creditor protected, which is a huge plus for some. Also, since it is indexed, your principal and your gains are guaranteed, even in a down market.
One thing that is often overlooked with regards to retirement accounts as people get closer to their retirement age is the inherent volatility of the markets themselves. Consider the housing bubble of 2008. If you were 67 and on the verge of retirement while being fully invested in your tax deferred, employer sponsored 401k or IRA, odds are that your retirement account took a major hit and you maybe were not able to retire or recover. The dive that the markets took forced you to work for more years, in some instances several more years.
One of the strategies that retirement expert Harvey Garza implements is, as a person gets older, to have them allocate more of their money toward annuities as opposed to “risky” investments such as mutual funds, stocks or other ETF’s. In some cases, it might even make sense to take funds from other investments and reallocate them to an annuity.
The reason for this is because an annuity can provide you with the security of not losing any of the money that you’ve accumulated. You still have the potential for growth, albeit at a much lower rate. However, there is a lot of peace of mind provided to someone, knowing that if the markets take a major hit like they did in 2008, you will not lose the money that you’ve saved for all of those years.
Another big advantage of annuities is that there is generally a rider that you can add to your annuity that would guarantee an income stream for life, even in the event that you outlive the funds that are in the annuity. Annuities are perhaps the only investment product available that have this feature.
Syndicated financial columnist Steve Savant interviews retirement specialist Harvey Garza on Tax Favored Investing. Right on the Money is a weekly one-hour online broadcast for TV and radio distribution. The show contains five ten-minute segments that are redistributed online as individual video press releases.