This ‘Boring’ Investment Could Be the Secret To Never Running Out of Retirement Income
Written by
Laura Bogart
Edited by
Kristen Mae
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When you’re building up your retirement savings, some options seem more glamorous than others. After all, who doesn’t daydream about making that life-changing investment at the ground level? For some people, maxing out their 401(k) contributions every year earns bragging rights among friends. But you might be overlooking one of the most powerful ways to ensure you don’t run out of retirement income — annuities.
Annuities may be considered “boring,” ironically, because of the same features that make them a smart investment: They’re predictable and stable, which appeals to more conservative investors. While the product structure for annuities can be complicated, once you understand it, you’re not in for a lot of action as the annuity pays out — and that’s often exactly the point.
To better understand why this “boring” investment might be your secret to consistent, guaranteed income in retirement, GOBankingRates spoke with an expert.
Annuities Can Be Overlooked Because They’re Not Well Understood
According to Curt Scott, CFP, president and investment advisor at Scott Financial Group, many people are intimidated by how complicated and expensive annuities can seem — largely because they don’t really understand how they work.
“An annuity is simply an investment offered through an insurance company. An insurance company usually offers either protection of principal, investment return or income payouts,” he said. “If the features and benefits an annuity provides have been compared to the cost and limitations — and have been discussed, accepted and agreed upon — an annuity can be a great addition to an investment portfolio to add protection and consistent return.”
In other words, while annuities aren’t one-size-fits-all, the right product can provide valuable peace of mind.
Annuities Can Be Structured for Lifetime Income
If there’s one thing retirees need during their golden years, it’s a stable income. Fortunately, annuities can be structured to provide just that — income that lasts throughout a retiree’s lifetime.
“This helps eliminate longevity risk and ensures that an individual will receive annuity income for the rest of his or her life,” Scott said. “Annuities can also offer floor and capped returns. An example would be annuity growth linked to the S&P 500. If the S&P 500 loses, the return is 0% due to the floor but has incurred no losses. If the S&P 500 increases, interest is credited up to the cap rate.”
In other words, annuities can help you participate in market gains while protecting against market losses — a balance many retirees appreciate. Working with a trusted advisor, you can find an annuity with a structure that suits your needs.
There Are Different Kinds of Annuities
As Scott explains, there are several distinct kinds of annuities to explore — most notably, fixed annuities, fixed indexed annuities and variable annuities. Sounds confusing? Let Scott break it down.
- Fixed annuities: “Fixed annuities offer a fixed rate of return throughout the term of the annuity contract. It is stable, consistent, and easy to plan,” Scott said.
- Fixed index annuities: “A fixed index annuity links its return to an underlying investment but doesn’t own the investment and usually has a floor and ceiling of return possibilities,” he continued. “For example, a fixed index annuity can link its return to the S&P 500 with a floor of 0% and a ceiling of 9%. If the S&P is -10%, the annuity is down 0% due to the floor. If the S&P is up 5%, the annuity is up 5%. If the S&P is up 20%, the annuity is up 9% due to the ceiling.”
- Variable annuities: For Scott, a variable annuity offers the greatest upside potential because you own the investments within it. “However, it can be subject to losses,” he said. “These annuities can offer some income or death benefit guarantees and are commonly used to defer taxes in nonqualified investment accounts.”
Ultimately, you’ll want to work with a trusted advisor to help you find the right combination of annuities that can provide sustainable income over the long term.
Annuities Can Be Blended to Maximize Benefits
When you retire, you likely prioritize predictability and security while minimizing tax exposure. Through a strategic combination of annuities, you can maximize your benefits. Of course, Scott has some suggestions.
“Use fixed index annuities for predictable gains, downside protection and to capture more growth in rising markets,” he said. “Use variable annuities when maximum growth is the objective and principal protection is not a factor. All these annuities can be used to defer taxes, and each has a different income payout.”
Blending multiple types helps balance risk and reward while meeting different financial goals. Scott encourages you to carefully evaluate the features, limitations and costs before deciding whether an annuity should be part of your investment strategy.
With advice from an expert who knows your unique financial situation, you can turn this “boring” investment into a way of securing stable income in retirement. And that might be the most exciting investment decision you ever make.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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