Americans turn to annuities for reliable income
June 30, 2016 by Tony Vaziri
Financial experts say annuities may be the better option for a dependable, long-term means of retirement savings.
A closer look at annuities
Annuities have long been considered one of the most secure, versatile instruments for retirement. Annuities involve far less risk than investments in the stock market, and they can help people gain potential protection against creditors, claims, lawsuits and bankruptcies.
Annuities are a financial vehicle designed to help people accumulate money for retirement or turn retirement savings into an income stream. Annuities can be thought of like reverse insurance: the person pays a lump sum at the outset and receive regular payouts, helping to ensure financial stability in retirement.
Positive opinions about individual annuities increased significantly from 2009 to ‘13, according to the Gallup Organization, with the perception that they are safe being the most common reason for purchase. Similarly, the number of owners citing the ability to “get payments guaranteed to continue for as long as you live” grew by nine percentage points to 85 percent.
A safeguard to trust
Annuities gained popularity in the 1920s. The National Bureau of Economic Research credits the decline of multigenerational households that could financially support older family members. Many Americans turned to insurance companies for financial stability. The attractiveness of annuities rose again following the stock market crash of 1929, as judicious investors sought a less volatile safe house for their hard-earned savings.
Today, lawmakers are again stressing the need for guaranteed income. The Obama administration created the Middle Class Task Force to raise the living standards of middle-class, working families in America. It promotes annuities as a form of guaranteed lifetime income.
There are several reasons annuities are widely considered a secure, dependable option for retirement planning. Among them are:
• Protected principal: Principal investment is not affected by market gains or losses;
• Tax-deferred: Earnings accumulate on an income-tax-deferred basis. They will not affect Social Security benefits, although increases in income may result in increased income taxation; and
• No probate: In most cases, an annuity payout can be completed without a lawyer.
Types of annuities
Don’t let knowledge be a barrier to achieving a secure retirement. Learn about different types of annuities, and select the payment and payout options that make the most sense. Also bear in mind that different annuities carry management fees from the insurance companies.
Fixed interest annuity. This product is designed to help accumulate funds for retirement. The money in annuity earns a guaranteed fixed rate of interest and accumulates on a tax-deferred basis, meaning the person does not pay taxes on earnings until they actually withdraw them from the policy.
Fixed indexed annuity. A fixed indexed annuity provides the guarantees that come with fixed annuities but is combined with the opportunity to earn interest based on changes in an external market index. Because a person is not actually participating in the market, the money in the annuity is not at risk.
Immediate annuity. An immediate annuity is purchased with a single lump-sum payment and, in exchange, pays a guaranteed income stream that starts almost immediately.
Tony Vaziri is the branch manager of the Indianapolis office for Bankers Life, the national life and health insurance brand that focuses on the retirement market. He can be reached atTony.Vaziri@BankersLife.com.
