Annuity | How Can Guarantees Help You in Your Retirement Plan?
Updated: Aug 4, 2020
Annuities can bring more stability and certainty to a retirement portfolio. But how do you know you are getting a good deal for your money?
The biggest advantage that annuities can give for your retirement is their guarantees. Or in other words, the contractual assurances that the contract-issuing insurance company promises to provide you.
For your retirement, you might already have a number of financial guarantees that will contribute to your retirement security.
You paid into the coffers of Social Security during your career. In exchange, Uncle Sam guarantees you will receive a monthly paycheck from the SSA once you begin your benefits.
If you buy Treasury securities, you are guaranteed a return of your initial principal once the bonds mature. The bonds also pay you guaranteed semiannual interest payments during the maturity period. You also have these same guarantees when you hold a CD from the bank.
Many Things in Retirement Aren't Guaranteed
Of course, other parts of retirement don't come with guarantees.
You aren't guaranteed for your money to grow when investing, although most likely your money will grow over the long run. Historical market data shows and suggests this.
However, you can lose money, and even your principal, during periods of market losses. This can be a bigger hit especially if you are the cusp of retirement and ready to start taking income from your portfolio.
When financial uncertainty arises, experts acknowledge that fortifying your portfolio with the guarantees and actuarial precision of annuities can benefit you in more ways than one.
Why Annuities for Guarantees in Retirement?
Mainly, because the life insurance companies supporting those annuities are so well-capitalized.
Under state insurance law, life insurers must maintain, at minimum, dollar-for-dollar reserves for every annuity premium dollar they bring in.
In other words, 100% of annuity premiums are covered by a legal reserve system maintained by the life insurer. The insurer must keep this up dollar-for-dollar in capital reserves.
Many life insurers go above and beyond this call of duty, holding a dollar-and-some-cents in reserve capital for every dollar of annuity premium.
What Guarantees Can an Annuity Add to Your Retirement?
Here are a few guarantees that annuities provide and how they can help strengthen your financial security in your golden years:
1. Guaranteed Lifetime Income
Annuities are the only instrument on the planet capable of really paying you a guaranteed income for life.
You can choose a payout option that will continue for the rest of your life, even if you deplete the entire contract value before you die. You can also choose a joint life option or joint and survivor option if you are married.
2. Guaranteed Growth
You can get a guaranteed interest rate, whether for a year or for many years in a period. This means guaranteed growth potential.
It applies primarily to fixed annuities. But fixed annuities almost always pay higher rates than other guaranteed instruments such as CDs and Treasury securities.
Many fixed annuities will also pay a higher "teaser" rate during the first year in order to attract new contract owners.
The interest rate that is paid will reset once the contract matures, that is, once the back-end surrender charge schedule has expired.
3. Guaranteed Protection of Principal
Fixed-type annuities are never an investment in the market. They are insurance contracts. If you have money in a fixed or fixed index annuity contract and markets decline, your money won't lose value due to the drop.
For managing their risks with these contracts, insurance companies have underlying investments of conservative low-risk profile. There is a strong record of them holding up even in hard-hitting markets and economic times.
This has become more relevant for investors than ever before since the outbreak of the Covid-19 pandemic, which effectively disrupted financial markets and the economy.
4. Guaranteed Wealth Transfer via Death Benefit to Heirs
This assumes that a wealth-transfer situation meets the conditions for this.
If you haven't been paid all the money in the contract, the remaining accumulation value will go to your designated beneficiary. The beneficiary, for example, may be your spouse or your kids.
Some annuities have death benefit-enhancing riders that can pay you more than this; it's an add-on that you can opt for in many contracts.
5. Guaranteed Protection for Qualifying Care
In certain qualifying situations, you might receive enhanced income from an annuity. What sorts of situations might those be? Generally for long-term care needs.