longevity risk

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16Nov

Annuities: A Longevity Risk Solution

BlogNovember 16, 2022

What makes an annuity tick? Short answer: Annuities are contracts made with an insurance company. Your annuity can be personalized to fit your exact needs.

The downside? The options can be overwhelming.

Types of Annuities

Fixed, variable, and fixed-indexed annuities are the three main types. Each comes with benefits and specific levels of risk based on your needs.

Type	Interest	Risk	Reward
Fixed	Guaranteed	Low	Predicted
Variable	Coordinated to investments	High	Unpredictable, yield varies
Fixed-indexed	Preset, linked to stock market index	Medium	Capped

Fixed Annuity

With the least risk and the most predictability, fixed annuities are contracted with a set interest rate. The only time the interest may vary is depending on terms of the contract with the insurance company. For example, per contract, sometimes the interest rate may reset after several years.

Variable Annuity

The variable annuity promotes higher yield but comes with the greatest risk. The interest rate is directly linked to an investment portfolio. Payments from the annuity are not consistent. If the investments are doing well, the payments will increase. If they are not doing well, the payments will drastically decrease.

Fixed-indexed Annuity

As middle grounds for fixed and variable annuities, this annuity comes to a compromised agreement. The contract carries lower risk and has a potential higher yield than fixed annuities. Thus, the interest rate will not sink below a present amount, but the rate is tied to a specific stock market index and could potentially rise.

Payment Arrangements

Immediate annuity, also income annuity, is when the holder begins receiving payments within a few years after the contract is purchased.

Deferred annuity is the most common in retirement, the most ideal to streamline retirement income for CPAs. These payments are started at a specific age while investment grows tax deferred.

Longevity Risk & Annuities

Since annuities guarantee lifetime income, they are a means to protect against the longevity risk your retirement will face. Payments are based on the health, age, and life expectancy of the annuitant holder. Note: The longer a person is calculated to life, the longer the payments may be.

Lifetime annuities: guarantee of an income stream for the holder’s lifetime. Often, the payments extend to beneficiaries after the holder’s passing. This covers your retirement and serves as inheritance for family.

Fixed-period annuities: guarantee of payment for a set period, also called term-certainty. These periods are typically 20-30 years. Moreover, the payments here are not as impacted by age and life expectancy of holder since they are a set period.

18Feb

A Retirement Strategy Offering Both Savings and Income

Podcast BlogFebruary 18, 2022

In economic uncertainty, finding answers that provide both savings and an income during retirement becomes challenging. While you try to recover from a downturn, so are companies. And history speaks for itself: employee retirement programs are usually the first cut. This was seen after the Great Recession when corporations across the U.S. reduced and eliminated 401(k) matches. More recently, with the Covid-19 crisis, some companies have begun reducing retirement programs and other employee benefits to aid in recovering from the crisis.

Since retirement is up to the employee, you want something that will withstand the market fluctuations, lower risk, and provide a promised regular income: annuities. As an insurance product, annuities are either done with a single, lump sum payment or recurring premiums that will grow and provide retirement savings and income stream.

Overview of Annuity Types

Variable annuities often yield higher returns because they are directly tied to the consumer’s investment choices. However, they can be decrease in value when the market experiences a downturn. No guarantee is offered with interest or principal protection with these annuities.

Fixed annuities accrue interest off a fixed interest rate set at the beginning of the contract. These are written in stone for a set number of years, meaning they cannot decrease in value for that time. Thus, these annuities offer some protection guarantee, have low yields, and offer low risk.

Fixed indexed annuities are a middle ground of the other two annuities. Based on the performance of a specific index, they provide guaranteed principal protection. Risk is medium with this annuity and has a capped yield that becomes part of the annuity income stream.

Ways Annuities Lower Risk in Retirement

Lifetime income – After accumulation, income payments can be received as either a lump sum, an installment payment for a set number of years, or lifetime payments depending on the rider. This may come with a fee, but some riders have no fee associated.

Tax-deferred – As long as funds remain in the annuity, your savings will remain protected from the yearly taxation on interest. As a chance to earn interest on interest, principal, and on taxes deferred, you get ahead on retirement assets that is not typically available with other retirement accounts.

Principal protection – Protecting your hard-earned money will help reduce retirement risks you will face. With fixed and fixed indexed annuities, your principal investment is protected with the chance to grow and become a stable income stream for retirement.

Growth – Annuities offer a flexibility for growth that may be capped or have a participation rate. These are linked specifically to market indexes. A variable annuity has the potential for a high growth rate, but fixed or fixed indexed annuities allow for participation but less risk.

For more information on how annuities can reduce and eliminate risk in your retirement, please listen to The Retirement Risk Show episode, “The Crossroads of Longevity and Volatility: How Annuities Help.”