Saturday, November 23, 2024
Financial experts often tout the advantages of having a diversified portfolio that cuts risk, especially as you inch closer to retirement age. But even low-risk investments can lose value in turbulent markets, especially if interest rates are rising. While fixed investments like bonds can help keep your portfolio stable, they typically grow slower than inflation, making your investment worth less in real dollars when it’s time to cash out the value. Plus, they can lose value! For these reasons and more, annuity investments can help you navigate turbulent markets by providing guaranteed returns and taking the guesswork out of retirement planning.
The main advantage of annuities in turbulent market conditions is obvious – stability. When you know exactly how much to expect when your investment matures – when it’s guaranteed -- it doesn’t matter if the market itself goes bullish or bearish. This makes annuities an especially attractive option when you want to take your gains off the table and protect them against potential market corrections.
Also, since you know you can count on definite income from your annuity in the future, you can invest amounts over and above your annuity accounts in riskier ventures with higher potential returns. Lastly, annuities with survivor payouts can help you preserve any inheritances you wish to pass on to your spouse, your children, or even grandchildren to help your family build generational wealth.
Many of the downsides of annuities reflect the advantages exactly. For example, annuities provide steady, guaranteed income without the risk of stocks and mutual funds, but this reliability comes at the cost of potential growth. In addition, annuities are not liquid and tie up your money for longer periods. So, if you must pull funds out before the specified time, you typically incur large surrender fees that can erase your gains. Lastly, annuities are not protected by the FDIC, making it important to purchase annuities from reputable financial institutions that can protect your nest egg.
You can find an annuity that caters to a wide range of investor needs. While this ensures a little something for everyone, it can prove challenging to sort out all the details, especially if you’re not sure of exactly what you need. Before you decide to purchase an annuity contract, it helps to line out what you hope to accomplish with the investment and hone in on the features that matter most to you and your family.
Deferred income annuities, or DIAs, let you select the future date when you want payments to begin. Because DIAs exist to create future income, they make an excellent choice when you don’t need access to funds before that selected start date, and while doing so, they ensure a guaranteed income for life, whether the market drops suddenly, stays stable, or goes wild.
In addition, DIAs can help simplify inflation planning by providing a cost-of-living adjustment, or COLA. When you purchase the annuity contract, you can opt for annual income increases between 1 and 5% for a small additional cost. Keep in mind that this COLA adjustment only begins when you start receiving income and not during the deferral period. The upside of this is that some options also work like an IRA, allowing you to defer taxes on the account when you withdraw funds rather than when you add them to the annuity.
For extra flexibility, you can also choose fixed deferred annuities with a guaranteed lifetime withdrawal benefit amount (GLWB). These annuities deliver a predictable amount of lifetime income that begins on a date you specify, locking in a reliable return tied to the age when you start withdrawals. Like most annuities, fixed deferred annuities typically allow you to enjoy a higher amount of income the longer you wait to begin payments.
Similar to mutual funds, deferred variable annuities typically let you make unlimited contributions and control investment option allocations. A serious rap on variable annuities is their internal expenses. Make sure you ask and know what those expenses are before you invest. Some low-cost options exist that cost you fewer than 50 basis points of your annual investment, and most have explicit fees listed so there are no surprises. Many times, the money you save by deferring taxes can more than make up for the fees your investment firm charges. The downside to these annuities is that earnings can fluctuate in turbulent markets, though typically less than with stock purchases and mutual funds.
Similar to certificates of deposit (CDs), deferred fixed annuities such as single-premium deferred annuities (SPDAs) guarantee you a specific interest rate for a set time period, typically of between 1 and 10 years. Keep in mind that most deferred fixed annuities build their charges into their interest rates and payout amounts. For this reason, it’s best to choose reputable issuers with clear-cut fee schedules.
Fixed Index annuities can help you rake in extra growth when the market is up, and volatility-controlled options let you benefit in excellent market conditions while protecting you from sudden drops. Fixed Index annuities typically track a basket of assets like stocks and bonds, but protect your investment from a declining market.
When choosing investment products, it helps to understand the details so you can make informed decisions. This goes double for annuities since they tie your funds up for years. When you understand key details, the safety and stability of annuities can help you easily weather turbulent markets, knowing you have guaranteed income coming either immediately or down the line. When selecting an annuity, consider these tips to ensure you know exactly what you’re getting for your investment dollars.
Annuities can get confusing for the very reason they make attractive investment vehicles – customization. Most contracts provide options for riders you can attach to your annuity, and these can either expand or restrict the benefits of your contract. Some of these riders include guaranteed lifetime income, long-term care features, and enhanced death benefits, but the one thing all riders have in common is that they incur extra costs on top of your base contract that can add up over time. To avoid surprises, insist that your financial advisor lays out all the fees upfront, even when it builds administrative costs, subaccount fees, and mortality costs into the base policy pricing.
As we stated, annuities are non-liquid assets meant for long-term investing, so it’s not a good idea to invest funds you might need for shorter-term goals into these accounts. For this reason, it’s imperative to understand your annuity’s time frame and invest accordingly. This means you want to invest other amounts into more easily accessible financial products to ensure you have enough cash on hand to meet your daily lifestyle needs and handle unexpected expenses. Keep in mind that annuities usually charge high penalties for early withdrawals. If you worry you might need access to funds in your account sooner, look for annuities that allow one free annual withdrawal.
Fixed and fixed index annuities obviously don’t match market growth, while variable annuities don’t protect you entirely against market losses. Each annuity product has its advantages and disadvantages, so knowing what you’re getting when you make the contract can help you avoid unpleasantness down the road. Fortunately, this diversity in financial offerings can help you better plan for retirement by giving you numerous options to help your nest egg grow over time.
Whether you’re a beginner learning the ins and outs of financial products or a long-time successful investor, market turbulence has the potential to dramatically affect your investments. But by selecting annuities geared toward slow, steady growth that you can leave untouched through market volatility, you can grow your retirement nest egg with confidence and weather any downturns and reversals of fortune with ease.
