Pensions, which were once a basic basis in our pension system, disappear in principle in the private sector, replaced by employer-sponsored 401 (k) pension plans. Employees must now find out for themselves how to make money.
But most people do not save enough even though they live longer. A GOBankingRates survey found that 69% of respondents had less than $ 1,000 in savings.
As a result, many financial planners today recommend that at least a portion of your retirement savings be invested in something that provides a guaranteed lifetime income – ordinary income that you, like retirement or social security, receive no matter what happens in the stock market. For many, it means an annuity.
Annuities in the past have had a bad reputation due to inappropriate sales practices and high fees. But financial planners say they have changed and should be an integral part of any discussion of retirement savings.
“For the right client in the right situation, I believe annuities can work well,”; said Nicholas Abrams, a financial planner and chairman of AJW Financial Partners in Baltimore, Maryland. “It is the financial planner’s job to do due diligence.”
What is an annuity?
An annuity is an agreement with an insurance company that offers a fixed payment flow to an individual, usually for the rest of their lives. It is primarily used as an income stream for retirees to help manage risk or survive their savings.
Basically, you buy a contract with an insurance company, for example, $ 100,000. The insurance company in turn agrees to pay a certain interest rate, and after a certain time you pay a fixed amount each month, quarter or year for the rest of your life. Some offer the option of letting a recipient get the rest of the money.
There are three types of annuities – variable annuities, fixed annuities and fixed index annuities.
- Variable annuity. You get a higher cash flow if investments go well and smaller payments if the investments do not do badly. “They mimic a fund,” says Abrams. “As the market grows, so does your account. As the market declines, so does your account. “But ‘they’re loaded with fees,” says Michael Kojonen, founder of Principal Preservation Services in Woodbury, Minnesota. “Most people who have them don’t know the fees because they don’t have to list them all.”
- Fixed annuity: You receive a guaranteed interest rate during the accrual phase of the annuity and a steady and predictable income stream during the payment phase. “Not many people are looking for fixed annuities today,” says Kojonen. “The older generation has the most. You can get an interest rate better than what you get in the bank, but usually you just follow up on inflation. “
- Fixed index annuity: “We are a big fan of the fixed index rate to supplement your pension account,” says Kojonen. “They offer moderate returns when the market is up and when it is down you lose nothing. And most do not have fees. “It offers more growth potential than a fixed annuity along with less risk and less potential return than a variable annuity.” This is a hybrid that combines features with variable and fixed annuities, “says Abrams.” It reflects a stock index, the most common being S&P 500, but the main thing is guaranteed. “
“One of the things that annuities provide is guarantees,” says Abrams. “Many people like them because we have seen a reduction in defined pensions over the last 40 years. Most workers have a one-time payment when they retire, but they have no plan for how to convert it into an income stream. An annuity will do that. “
Rodney A. Brooks writes about pension and personal finance issues. His column is currently running US News & World Report. He has written columns on pensions for Washington Post and USA TODAY. He has also written for national geographical, Next Avenue and Black Enterprise journal. He retired as deputy editor / staff economist and retired columnist for USA TODAY 2015.