Article published by Kiplinger.com
Written by Brian Skrobonja
“You can make your best effort for planning your retirement, but how much of what you are thinking or planning can you actually control?
“You can’t control the market, how long you’re going to live, inflation, health care costs, your health care needs, tax law changes, pension or Social Security solvency, economic shifts, government intervention, the list goes on.
“There is so much uncertainty in life. Besides a weather forecast, we don’t know what tomorrow brings for any of us (and even the weather forecast is not always reliable).
“The reality of what could happen can hit you like a freight train when you begin to think about what you can and can’t control. All this uncertainty surrounding retirement is why annuities are so popular. They are a way to transfer risk over to an insurance company and provide some sense of safety for the future.
“This concept is nothing new. We transfer risk to insurance companies for all sorts of things and rely on them to cover losses when things outside of our control occur. Retirement is no different. In fact, retirement income can be a much greater risk than any of these other things we deem worthy of insuring when you think of the amount of money that is at stake.
“The risk of running out of money is a real concern for many retirees and is why there is an estimated $2.53 trillion of retirement assets are held inside of annuities, according to Statista.
What is an annuity?
“Annuities are issued by insurance companies as a form of insurance, allowing retirees to transfer the risk of running out of money for retirement income or losing money in the stock market away from themselves and onto the insurance company.
“There are essentially three types of annuities: variable, fixed index and fixed rate. The variable allows for stock market investing, the fixed rate has a set rate of interest and the index has a proprietary crediting method that is tied to an index.
“The fixed rate and index have guarantees against loss of principal, while the variable has a degree of downside risk similar to any other investment. The index and variable have benefits that can be added for a fee that provide the annuity holder a guarantee for income in their retirement.
“The income benefits vary from contract to contract and are typically associated with your age. The older you are, the higher the payout percentage can be and it is determined by the proprietary calculations of the insurance company.
“One of the misconceptions about income benefits is that the use of this feature is an exchange of the principal for income. That is not true. The income benefits are separate from the account value. However, the income taken through the benefits and any fees applied to the account are deducted from the account value and can deplete the account over time. This is where the insurance kicks in and continues the income beyond the assets in the account. Of course, guarantees of an annuity are based on the financial strength and claims paying ability of the issuer.
“Comparatively speaking, if you use the 4% rule as a distribution strategy from your investments, that assumption assumes that based on past performance that your money should last for 30 years. So, even while using an investment, you are still facing the risk of depleting your assets but without the insurance for income. I explain this more in a previous article, My 5-Minute Retirement Plan.
“Often there is some confusion between what was just described and the fixed annuity version of this income benefit, called an annuitization. When an immediate fixed annuity is purchased, the amount deposited is essentially a purchase of a pension-like payment for a specified period. However, these two income benefits are not the same and shouldn’t be confused.
“As you can see, annuities are complex, and it would take an entire book to outline and compare all of the annuity types. So, while I believe that annuities should be considered for certain situations, you want to make sure you know what you’re getting into and avoid being sold a program that you don’t understand. This shouldn’t be a problem if you work with a fiduciary financial adviser who doesn’t just sell annuities.”
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Bob has a passion for making your money work hard for you. He takes profound joy in ironing out a plan for a long and comfortable retirement, no matter what your current income or level of wealth. With a work ethic second to none, he has a zeal for transforming uncertainty into stable ways for you to protect your future and your family. He knows that the quality of your life you enjoy today can remain as rewarding—or even better—after retirement.
With a strong background in information technology, Carol is instrumental in building operational policies and strategies that keep the organization functioning smoothly. Carol’s organizational skills and her flexibility to jump from priority to priority along with her commitment to customer service makes her an essential part of the Grimard Financial team. When Carol is not working with the Grimard Financial Family, she is a very creative and accomplished photographer.