Check annuities for retirement rescue
In a crowd of average Joes and Janes, you'll be hard-pressed to find anyone who knows a lot about annuities, but you'll likely find plenty with a generally negative feeling about them.
That connotation may be well-deserved, yet in today's volatile investment climate annuities might represent a safe haven.
Tom Warschauer, professor of finance at San Diego State University, says, "The insurance industry has not done a very good job recommending products that specifically fit their clients' needs. They look at what they want to sell and find a place for them in everyone's portfolio."
One big issue has been the lack
of transparency about charges embedded in
annuity products, and since it's difficult
to decipher those costs, "There's a lot of
room for abuse," says Warschauer, who's also
a professor of finance and director of the
Center for the Study of Personal Financial
Planning at the university.
Beth Almeida, executive director of the National Institute on Retirement Security agrees. "The costs associated with the purchase of individual annuities eat away at the overall retirement nest egg. So a retiree may get a regular check, but their overall retirement income is diminished."
But in today's uncertain and
volatile market, "retirees and near-retirees
are likely seeking safe haven," says Almeida.
And Warschauer agrees, annuities "have some
very valuable uses in retirement planning"
in this economic climate.
During your working years, return
on investment is generally the primary focus.
But in retirement, "the new ROI is 'reliability
of income,'" says Robert E. Sollmann Jr.,
senior vice president of MetLife's Retirement
"The painful lesson we are learning
from today's market is that the conventional
wisdom -- 'diversify' -- isn't cutting it.
International, commodities, U.S. stocks are
all down. The guarantees provided by annuities
that can deliver regardless of market performance"
are needed to balance a retirement plan, Sollmann
Think annuities may be worth a look? With so many annuity types, it's easy to get overwhelmed by possibilities. Here are some directions that experts say pre-retirees and retirees should consider.
Let's start with some basic
definitions: Annuities are life insurance
contracts sold by insurance companies, brokers
and other financial institutions that provide
a regular periodic payment to a policyholder
for a specified period of time. They are paid
for before retirement in exchange for lifetime
payments after retirement and are intended
to provide a regular level of retirement income
to meet day-to-day living expenses.
|They come in two general categories:
||Fixed annuity. The insurance company guarantees the principal pays a minimum rate of interest. As long as the company is financially sound, money in a fixed annuity will grow -- and not drop -- in value. The growth in value or benefits paid may be fixed at a dollar amount, at an interest rate, or by a specified formula. The interest rate usually starts out as a fixed percentage and is adjusted annually.
||Variable annuity. Your money is invested in a fund similar to a mutual fund -- but one open only to that insurance company's investors. The amount paid out depends on the performance of that fund.