Why Annuities are the Best Investment for Retirement
Many Americans, when they’re approaching retirement age, are anxious about their retirement savings plans. As a result, people are looking for lifetime income due to susceptible market volatility, and retirement. The challenges are created by the cognitive decline to secure their income in retirement. So, how do we balance our financial futures amid concerns about outside forces impacting our retirement plans? By choosing the right lifetime income products to provide financial security in retirement, this task can be accomplished. In this article, we discuss why annuities are the best investment for retirement.
Investing a portion of your assets
The first thing to do is to invest a portion of your assets during your accumulation years to a fixed annuity. Particularly, if it’s offered as part of your employer’s sponsored retirement plan. This strategy helps solve the risks that keep pre-retirees up at night. When you invest in a fixed annuity, you’re guaranteed that your account will never decrease in value. This works even in the most volatile market environments such as the one we’re currently experiencing. Also, you receive a minimum rate of return, which is never lower than the stated amount. It has the potential to be higher than the guaranteed minimum.
Investing a portion of your savings
A drawdown strategy such as a 4% withdrawal a year in retirement can put retirees at risk, all for exhausting their savings as they age toward retirement. The right fixed annuity never runs out, and it can provide peace of mind as you near retirement. You no longer receive a regular paycheck, so investing a portion of your savings gives you the flexibility to allocate money to other asset classes. This could mean investing in an equity mutual fund where an individual gets market exposure.
The Secure Act
Earlier this year, the Secure Act was passed to strengthen retirement security in America. A provision within this legislation enables employers to offer annuities as an investment option within 401(k) plans. Now more individuals will gain access to the best investment options for retirement.
Fixed lifetime annuity
Individuals tell us that the certainty of retirement income is what they are trying to achieve with their retirement savings. A majority of respondents believe that a guaranteed lifetime income annuity provides a feeling of security. More than 83% facilitate better planning by enabling them to know how much they can spend in retirement. And, to dip into other assets, you will know your fixed lifetime annuity will continue to pay you through retirement.
Second, the traditional 60/40 rule-of-thumb is for an investor to hold 60% of their retirement savings in equities and 40% in bonds. However, funding your retirement does not necessarily provide steady income and can leave you exposed to market volatility with interest rate fluctuations. Some retirees who must use their fixed-income investments for income needs can end up with increasingly less income, creating a dynamic where they could also completely run out of assets. In contrast, some retirees fear outliving their savings and maybe overly conservative. These individuals may spend very little and are not achieving the quality of life that is possible in their retirement years.
Incorporate annuities into a retirement plan
Those who incorporate annuities into their retirement plan can also protect against one of the most challenging risks to solve for longevity risk. Nobody can predict how long they will live, and using fixed annuities mitigates the risk of spending your nest egg too quickly or conversely, stockpiling all your savings and not fully enjoying retirement. Instead, fixed annuity products can provide certainty about how much income you will receive, allowing you to plan and make financial decisions accordingly.
Most people remain unsure of where lifetime income comes from or how to get it. The TIAA survey found that one-in-three (32%) didn’t know if lifetime income is a feature of their employer-sponsored retirement plan; of those who thought it was, many incorrectly believe it is offered through mutual funds (35%) or target-date funds (20%).
Employees retirement savings
We believe annuities should be offered in employer retirement plans because they can insulate employees’ retirement savings from the most pressing risks while helping them receive lasting income. Retirement plan annuities or those sold as in-plan options to participants in retirement plans are typically low-cost options. Also, they may have lower costs than many other investment options because they utilize economies of scale to keep pricing low.
But investors should be aware that all annuities are not the same. Retail annuities—available outside of group retirement plans—may have higher fees and are the ones that can have high sales loads (commissions), high surrender charges, and high investment expenses. This brings us to the end of our discussion about why annuities are the best investment for retirement.