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Ensure steady retirement income with a low-risk annuity investment

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In North America, over ten thousand people a day, 3.5 million people a year, 35 million people in the next 10 years, 70 million people in the next 20 years turn 65. What is scariest is they’re about to make the biggest financial mistake of their lives. They’re going to commit all of their retirement savings to defending their principle instead of defending their purchasing power, and at that rate, they’re going to run out of money and find themselves overly dependent on the government, or their children, or both.

Annuities play an increasingly important role in helping individuals achieve a secure retirement, particularly as access to traditional pension plans declines, and longevity of retirement increases. The unique guarantees offered by annuities are also attracting more attention as individuals seek ways to protect against a replay of the market conditions experienced in 2008.

When people hear the word annuity, they say, ‘Oh my gosh—get me out of here. I don\'t want to talk about annuities!’ Yet when we hear the word guarantee, or protection, or never outliving your income—everybody wants to hear more.

The financial crisis of 2008 has created an increased appeal of guarantees—the subject of income guarantees is being discussed more frequently than it has been in the past. In addition, consumers wish they were better protected during the financial crisis. Coupled with the already lingering problems of decreasing defined benefit plans, we are finding more and more individuals are willing to explore annuities and the guarantees they provide.


Do diversify your retirement income portfolios with annuities

Annuities are a lifelong stream of guaranteed income that you buy from an insurance company with a lump sum of money. One popular strategy is to use annuities together with government pensions to meet all non-discretionary spending needs. This will provide peace of mind.

You know the basics are covered no matter what happens. After purchasing annuities, you can afford to take more risks with the rest of your portfolio, which may actually increase the amount you leave your heirs if you live a long time and markets perform well.


Do create a cash flow plan

Start by calculating what income you require in retirement and then factor in any government programs and pensions you expect to receive. If you have a gap between your estimated annual income needs in retirement consider filling it with an annuity.


Do determine what is most important

Annuities buy you peace of mind as well as a regular flow of income. With some of your retirement savings annuitized, you will have fewer investing decisions to worry about. You may also feel more comfortable with whatever stock market exposure you have in addition to your annuity. Annuities are especially relevant for people who are worried about outliving their money. The chances of living to 95 are less than one in 10 for people now aged 50, but living an active life through your 80s is far from uncommon.


Do determine the role annuities should play in your portfolio

There are good reasons to give annuities more consideration. Unfortunately, while the concept is simple—you hand an insurance company a lump sum in return for a predictable cash flow—the details are complicated. There are several types available, so when weighing your decision, you first need to determine whether annuities fit your circumstances and the role they should play in your portfolio. Then you can move on to when and how to buy them.


Do seek professional advice

Given the financial industry’s penchant for promoting products, it can be surprisingly hard to find someone to sell you annuities. For one thing, although annuities are really an investment product, they can only be sold by someone with an insurance license. So unless they are dual licensed, investment advisers may not be able to help you with annuities even if they want to.

Annuities also pay lower commissions than mutual funds and other investments, so advisers need to overlook their self-interest to encourage you to convert some of your nest egg to annuities. Work with an independent professional who can provide you with unbiased advice, and select the best option for your situation. A process this complicated, with so much of your livelihood riding on the decision, should be handled by an experienced professional.


Do not trash annuities

Although it is considered a sign of investing acumen to trash annuities, it is important to understand the benefits before first discounting them. Annuities may be the best retirement product that hardly anyone buys. Like defined benefit pensions, they provide guaranteed income for as long as you live. But while employer pensions are considered the gold standard of retirement income plans, few ever think about annuities.

Economists have coined a term to describe their baffling unpopularity: “the annuity puzzle.” Just about every expert who has studied annuities believes they are the most effective safeguard against “longevity risk,” or the possibility of outliving your wealth, which is remarkable because you normally can’t get economists to agree on anything.


Do not worry about having a lack of control

One of the biggest problems people have with annuities is lack of control. You hand over a sum of money to an insurance company and it commits to paying you on a monthly, quarterly or annual basis for as long as you live. Annuities can’t be cashed in or sold to someone else. A way around this limitation is to invest some of your money in annuities while leaving the rest in stocks, bonds and cash, or funds of various types.


Do not listen to those who say interest rates are too low

If you ask for opinions on annuities, you may be told it’s a terrible time to buy them because interest rates are low. In fact, rates are a key factor in determining annuity payouts. If rates were higher, annuities would look better. People always say interest rates are low and that it’s not a good time to annuitize, but interest rates have a diminishing role in pricing annuities as the retiree ages.

Basically, annuities get better as you age because insurers don’t expect to have to pay you for as long a period as if you had bought earlier. The simple fact is, an annuity may be a great idea, but hardly anyone buys one. It is easy to blame low interest rates, which depress the amount of annuity income one can buy these days. But annuities were not in vogue even when interest rates were much higher twenty years ago.


Do not worry about seeing the whole staircase, just take the first step

The low level of credibility that annuities have with investors can, in part, be explained by the sterile way insurance companies market them. Insurers treat annuities as something opaque, full of terms and conditions and, most importantly, utterly disconnected from investor anxiety about the financial markets.

While not ideal for everyone, or even a majority of people, annuities should be much more popular than they are right now. We’re in an age of conservative investing, where bond funds have been a constant challenger in the past several years for title of best-selling mutual fund category, and where mountains of investable cash are sitting in savings accounts. Three of the past four years have been good for stocks, but only now is money starting to move back into equity funds.


Do not be afraid to ask for a second opinion

Getting quotes from different insurers can save you money. The range between the highest and lowest quotes is typically 5% to 10%. Also, many individuals worry about leaving their heirs with nothing. However, annuities are almost always sold with guaranteed payments for a minimum number of years. When you buy an annuity, you’re relying on the insurance company to make payments for a specific period of time. Going with an insurance company that is large, well-established, and well-capitalized helps individuals pass their sleep test knowing that what they think the product will do, will actually do it.


The day you step into retirement, your entire financial life collapses down to one issue, and the issue is perfectly binary. There are only two possible outcomes, and they’re mutually exclusive. On the day that you step into retirement, is your money going to outlive you, or are you going to outlive your money?

Annuities strive to help mitigate financial risk, while providing benefits. Although annuities will usually restrict options within the product to manage not only behavior risk, but also longevity risk. For example, waiting periods to draw income, minimum age requirements, and age-based guarantees help to drive more predictable behavior but also help to manage longevity risk.

It’s essential to work with a company that has the financial products and services desired, as well as the history and the reputation that back them up. Financial strength provides additional protection against risk beyond that provided through product design, hedging, and strong risk governance.