As America’s economic landscape continues to change, so does the climate of retirement planning. Baby Boomers are aging out of the workforce at a rate of 10,000 every day, while Medicare and Social Security costs steadily rise. Retirees are also living longer than ever, which means that individuals who retire at age 65 can expect to live an additional 20-30 years—two to three decades without an income. With rising longevity comes the increased likelihood of outliving one’s nest egg, which makes having a plan in place to provides steady income for a pre-determined period of time even more critical. —
Since inflation rises at a rate of approximately 3 percent annually—a rate that government subsidies cannot match—Medicare can no longer cover retirees’ medical expenses as it did for previous generations, nor can Social Security provide enough for all living expenses. For these reasons, annuities are gaining popularity among seniors who require a safeguard against longevity risk. Living longer means increased potential for medical expenses; one major illness or injury can deplete a senior’s retirement savings in no time.
As a result, demand for financial products that provide a guaranteed income has boosted the growth of annuities, particularly the new breed of fixed indexed annuity products designed to accommodate client participation in gains generated within the wider investment markets.
Annuities are a form of insurance that provide a guaranteed, steady income and distribute cash on a regularly set schedule. Since expenses generally do not change much in retirement, most financial advisors will suggest preparing for income requirements of 70 percent of the individual’s pre-retirement earnings, which may not be realistic for seniors with inadequate savings or no alternative income source like a pension to cover everyday living expenses.
The real challenge, according to retirement specialist James D. Stillman of JDS Wealth Management in Mooresville, North Carolina, is clearing up the misconceptions that have scared seniors away from annuities in the past. Just as important is reminding investors that no matter how careful they are, there is no way to tell how their investments will perform in the future, or how many years their pensions will be able to pay out.
“When we use annuities we use them for two reasons—safety against stock market corrections, and to guarantee a lifelong income stream,” Stillman says. “Individuals who try to act alone will always be vulnerable to financial setbacks and outliving their assets, which is why annuities were invented.
“Annuities shift the risk to insurance companies, which have the financial clout and experience to handle them.”
Even though today’s market conditions are perceived to be more stable than they have been in recent years, many investors remain wary of the risks for severe losses after the 2008-2009 market crash. This wariness motivated insurance carriers to develop the newest hybrid fixed indexed annuity that increases the investor’s potential to participate in market gains while still minimizing the risk of loss.
Known by a variety of names throughout the industry, the hybrid fixed indexed annuity connects the user’s potential to participate in market gains to more than one index. Where a traditional fixed indexed annuity will base performance on one major index (such as a stock index like the S&P 500), a hybrid fixed indexed annuity can allocate the risk of loss and maximize the potential for gain by combining multiple indexes.
Annuities can protect capital invested in the event of early death, pay a spouse’s pension for as long as they live, and provide a hedge against inflation. Establishing an annuity requires individuals to provide a lump sum that is applied by their insurance company to generate payments on a monthly, quarterly, or annual basis. Standard annuities can be fixed or variable. Fixed annuities are invested on a pre-determined basis, while variable annuities can be invested according to the user’s discretion.
Annuities can be purchased in immediate form for payments to begin right away, or in deferred form, where it has time to grow before payments begin. An experienced insurance professional can help guide individuals to the annuity product that best suits their needs.
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