As the Baby Boomers head into head into retirement, more and more of them will be facing a situation that a growing chunk of retirees are already grappling with: life in retirement without a pension.
What's worse is there have been numerous studies that have shown the Boomers have not saved enough to fund what will be potentially 25 to 30 years of a healthy and active retirement.
To help solve this problem, many in the investment world are taking a fresh look at annuities, and many financial planners — and even President Barack Obama's administration — are finding there's a lot there to like.
Annuities have long had a reputation for being tough to understand and expensive, but with the new types of annuity products that have emerged in recent years, it pays to at least have a look as they can be a powerful way of guaranteeing a stable revenue stream.
Of particular interest are immediate annuities — perhaps the easiest of the annuity products to understand — which take a lump sum and buy regular payments from an insurer for the rest of a person's life. This type of annuity can even be tailored to a person's situation by adding riders that guarantee payments for their heirs or to adjust monthly payments for inflation.
Those riders come at a cost, so it's important to carefully review these features and assess how they fit with your specific needs.
The annuity's main strength is that it creates a "personal pension stream," said Lynne Ford, CEO of ING Financial Solutions.
"When you are not working full time, knowing how much is coming in is a really important thing," Ford said. Once retirees know what is coming in, they can calibrate their lifestyle against that income, she said.
It's important to note that an immediate annuity is distinct from deferred annuities, which are generally used as retirement savings vehicles.
Another thing to consider is that annuities can help to diversify your portfolio. Many times, people take an all-or-nothing approach with their retirement savings: opting to either live off their nest egg in retirement or to purchase an annuity. But the right strategy might be a hybrid of the two.
In fact, several academic studies have found that guaranteeing a portion of your retirement income with an annuity can allow you to take more risk with how you invest the remainder of your savings, and ultimately produce a higher return.
This approach can help a retiree replicate a more traditional form of retirement savings, with Social Security payments forming one portion of retirement income, the annuitized portion taking the place of a pension, and the remaining savings forming a third bucket to draw from.
Also, leaving a portion of your retirement savings outside of the annuity insures that you will have funds in case of an emergency. That's important because once you hand over the money, you no longer have access to it.
Another strategy - buying several annuities over time - can both hedge against interest rate risk and get better returns. William Werfelman, spokesman at the New York Life Insurance Co., cited figures showing that a 65 year old buying a $100,000 policy can boost their return by nearly $1000 a year by waiting until age 70 to buy an identical policy.
Sure, annuities aren't for everyone. But if the argument against an annuity is that you can get a higher payout manging the money on your own, the chance is that you can't, said Christopher Blunt, executive vice president of retirement income security at the New York Life. The company sells more fixed immediate annuities than any other firm, according to Limra, a research firm that tracks the industry.
The best argument in favor of buying annuities? You don't know how long you will live in retirement. Investing on your own could produce higher returns, but probably won't, said Blunt.If it works out for you, great, but if it doesn't, there's a good chance you will run out of money earlier than expected.
A lot of times with annuities, it's the "sticker shock more than anything else," said Craig Hemke, president of BuyaPension.com, which sells annuities. But what people need to be educated about is the longevity risk, he said.
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