Senior Americans considering the purchase of an annuity to help save for or provide income during retirement should understand the options, features, benefits, and costs to ensure that it meets their individual financial situations.
An annuity — a flexible financial retirement vehicle that combines guaranteed lifetime income payments with other insurance benefits and tax-deferred savings — can be a beneficial option for many senior citizens (and generate a healthy commission for you, the agent).
Age is only one of the important factors in considering an annuity. Your prospects should also take into account the number of years that they expect to live in retirement, the nature of their retirement lifestyle, other sources of income, and their life expectancy.
Today’s annuity products offer greater liquidity, flexibility, and a broader range of features than in the past. “Annuities are tailored to address longer life expectancies, increasing retirement horizons, and other new retirement realities,” says Mark Mackey, president and CEO of the National Association for Variable Annuities (NAVA). “Annuities can be used in a variety of situations for older Americans, including individuals who require a paycheck for life, and those who wish to take advantage of the traditionally higher returns of the equity market while having protection of their investment against downside market risk.”
As with any investment, an annuity is not appropriate for everyone. According to NAVA, it makes sense to ask your annuity prospects these ten questions:
1. What are your retirement goals and objectives?
It’s important to understand your stage of retirement and define your personal retirement goals (e.g., travel, living comfortably at home, leaving money to heirs, starting a second career, and so forth). If you’re retiring at age 65, your needs will be different than if you’re retiring at 80.
2. When do you expect to retire?
Estimating when you expect to retire is a critical step in structuring a financial retirement plan. Many Americans today are retiring earlier than previous generations. For example, a recent study revealed that one in three people (34%) expect to retire between age 50 and 64.
3. How long do you expect to live after retiring?
Because Americans are living longer today, it’s increasingly common for them to spend 25 or more years in retirement. Projecting your life expectancy will help ensure that your savings will sustain your envisioned retirement lifestyle. To estimate your own life expectancy, consider such factors as your current health, the life spans of immediate family members, your current lifestyle, and your outlook on life.
4. Will you need supplemental retirement income?
You can use an annuity to supplement your other retirement income sources by providing payments that can’t be outlived. Calculating the “gap” between available retirement income (such as Social Security, pensions, and savings) and essential living expenses (housing, insurance, etc.) can help determine the benefit of an annuity.
5. Do you want your retirement savings to keep growing?
As Americans spend more time in retirement, many are in a position to invest a portion of their assets in equity-based products (which traditionally provide the highest returns), rather than more conservative investments, such as CDs and bonds. Deferred annuities allow assets to grow tax-deferred, offer protection against downside market risk, and provide guaranteed lifetime income payments at some point in the future.
6. How can an annuity help meet your retirement needs?
An annuity is the only personal retirement product providing a guaranteed paycheck that you can’t outlive. In addition, deferred variable annuities allow you to take advantage of tax-deferred investment growth, while offering “living benefits” that offer insurance protection against downside market risk, together with a variety of options to access your money. Annuity death benefits provide additional protection of your assets.
7. Is there a surrender period associated with the annuity?
There might be charges for withdrawing some or all of the funds in the annuity during the early years of the contract, generally five to seven years. Although most annuity contracts have surrender periods, many newer products have short or no surrender periods.
8. When will you need access to the money in your annuity?
Many deferred annuities offer the ability to withdraw a portion (such as 10% to 15%) of the initial investment each year without surrender charges. A number of annuities also provide you with full access to your money — also free of surrender charges — in cases of serious illness.
9. What do you need to know about annuity fees and the companies offering annuities?
All financial products, including “no-load” investments, have fees. Although fee structures vary, it’s essential to understand what you’ll be charged and when. You should also consider the financial strength, rating, and reputation of the insurance company. It’s essential to know that the company backing the annuity guarantees will be there in the long run.
10. Does your financial advisor understand your retirement goals?
Seek advice from an advisor who’s knowledgeable about retirement-related issues and current annuity features and benefits. Prepare a list of objectives before meeting with them, so that together you can develop the best plan to meet your financial retirement goals.
“The insurance industry is committed to helping all consumers make more informed retirement planning decisions,” says Mackey. “Our hope is that these questions will help seniors better understand how annuities work and the tremendous value they provide.”