How Much Should Annuities Factor Into Retirement Planning?-5 Experts Weigh In

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Last Updated on: 9th September 2019, 03:28 pm

Because annuities provide a fixed income stream to an individual, they are a popular financial product for retirees, or those formulating a retirement plan. In this article, 6 financial experts chime in on how much annuities should factor into retirement planning.

Annuities Offer Tax-Deferred Growth In Addition To Your 401(k) And IRA

“Annuities should be used to save for retirement because they offer tax-deferred growth in addition to your 401(k) and IRA. Three good choices while you're saving for retirement include multi-year guaranteed annuities (CD-like fixed annuities with a set interest rate), fixed indexed annuities (offering market-linked growth potential while guaranteeing principal) and deferred income annuities that offer lifetime guaranteed income at a pre-determined future date. All three are tax-deferred until you start taking money out.

Deferred income annuities let an investor purchase guaranteed lifetime (or joint lifetime) income beginning at a future date. These contracts typically guarantee more income than would be available from a combination of deferred contracts with future annuitization or income activation. These plans make the most sense for policy owners and annuitants who estimate that they will enjoy longer-than-average life expectancy. The hand's off nature of these annuities during the holding period, before the income starting date, typically allows the insurance company to credit higher rates of return to the client in this product type than would otherwise be available in the marketplace.

Investors with a significant IRA or 401(k) portfolio should consider a qualified lifetime annuity contract. Tax law currently allows an IRA owner to move 25% of his/her account up to $130,000 during the 2019 Tax Year into a QLAC-DIA contract. This allows the postponement of Required Minimum Distributions on the assets so allocated, saving a significant portion of the IRA for the future production of guaranteed income. This is a great way to set aside a portion of assets today, avoid distribution requirements beginning at age 70.5 and postpone the production of income from these funds to as late as age 85. This creates an additional boost to income in our older ages when it might be needed for inflationary increases in the cost of living or increases in medical expenses.”

Ken Nuss, CEO, Annuity Advantage

Annuities Should Serve As The Foundation Because They Provide Guaranteed Income In Retirement

“Annuities should serve as the “foundation” of a retirement strategy. Their primary purposes are to pay out guaranteed income, to protect principal, or to offer tax-deferred growth.

Here are a couple of ways they might be the foundation of a retirement strategy:

You can use an annuity to build out a dependable income stream to cover your retirement must-haves, such as living expenses. The other parts of your portfolio would then help cover your retirement discretionary spending.

If someone has money that they can't afford to lose, a fixed-type annuity can be a great, safe place to park those dollars for conservative interest-earning potential. However, the investor should be sure that they won't that balance to be fully liquid for at least some years down the road (for example, 5-10 years, which might be how long the annuity contract term lasts for).

If someone can't qualify for underwriting a life insurance policy, an annuity may be a way that they can leave assets behind for loved ones.

People might also use an annuity to pay for long-term care costs if other insurance solutions aren't possible. But this benefit needs to be explored very carefully, as not all contracts offer the same value for covering long-term care needs.

Fixed-type annuities aren't a vehicle that is meant to compete with the stock market or with stock funds. They fall more into the fixed-income asset class.

If someone bought one of these products, the interest they earn will be somewhere between the interest-earning potential of a CD and a bond.

One final thought. Annuities can also serve as a ‘better' vehicle for income certainty in retirement than bonds can.

This is because of how insurance carriers manage risk in their payouts to their annuity policyholders. The insurance company not only invests annuity premium dollars in low-risk, fixed-income investments. It also includes people's expected mortality rates in its calculations of what it will pay out to annuity owners.

This is what is as a mortality credit. The premiums paid by those who pass away earlier-than-expected add to the gains of other participating annuity owners, further strengthening the insurance company's pool of funds.

This provides a larger credit to survivors than they could potentially achieve outside of this pool of funds using other individual investments.

Mortality credits aren't used in bond payouts.”

Ian Myers, Communications Manager, SafeMoney.com

Figure Out How Much Your Cost Of Living Is Now

“I believe utilizing annuities for laying a foundation for retirement income in addition to social security is a great strategy for retirement planning.

Figure out how much your cost of living is now. Figure out how much social security will cover towards those daily expenses then solve for the remaining balance. Annuities can cover that gap.

You may want to solve for inflation too.

I'd also recommend purchasing a long-term care annuity now to plan for later. The Department of Human Services is predicting that 7 out 10 Americans age 65+ will need some sort of long term care.

The concept is that the long term care annuity doubles or triple your investment to generate a tax-free LTC benefit.”

Shawn Plummer, Director of Advanced Annuity Sales, The Annuity Expert 

Annuities Can Provide A Foundation That Offsets Portfolio Fluctuations Due To Overall Market Volatility

“Income annuities are a very reliable way for investors to create guaranteed income during retirement. These policies can provide a foundation that offsets portfolio fluctuations due to overall market volatility. Immediate income and/or deferred income annuities provide retirees with peace of mind and portfolio stability. In this way, they act like a personal pension plan for the owner(s). And income annuities have a long history of safely proving income to the insured. These are not risky products. Most are provided by top-rated insurance companies that have been around for decades.

Policies are versatile and can be tailored to fit many situations. Income can be created on a joint or single life basis – and many plans provide increasing income based on inflation metrics and/or overall policy growth. When purchasing an annuity, you will know what your payments will be for your selected duration. Several policies offer increasing payments as well. And of course, annuity plans can guarantee income for the life of insured(s) as well.

It's important to note that insurance companies don't keep any residual principal at passing. These plans can be set up to provide for the owner's beneficiaries. They accept both Qualified and Non-Qualified funds depending on someone's needs. There are several ways to structure an income annuities so to be meet the future income needs of their owners while also protecting any unused principal in the event of an untimely passing.

There are very few investments that do what annuities do on a guaranteed basis.”

Adam M. Hyers, President, Hyers and Associates, Inc

Annuities Should Play A Significant Role For Retirees Without Pensions

“For any retiree without a pension, annuities should play a significant role in their retirement planning.

As much as Ken Fisher claims to hate annuities, they serve a purpose, which is to provide guaranteed lifetime income. Unlike Ken Fisher, I actually sit down with couples every day that are looking to retire. I'm indifferent as to where their income comes from (stock dividends, bond interest, or annuities). But when you show someone how much income they can expect in retirement, and then ask them what portion of that, if any, would they like guaranteed the answer is never 0%.

Only insurance companies and banks can even use the word guaranteed and there is a reason retirees love CDs. People reach a point in their financial lives where they don't want to see their portfolios or net worth go backward.

And while annuities should never be the dominant investment in a portfolio, they absolutely make sense as part of an income plan.”

Robert Cucchiaro, CFP(r), CRPC, AAMS, Partner, Summit Wealth & Retirement Partners

There are numerous benefits of annuities being included in retirement planning. Using annuities as a foundation for a retirement strategy is a reliable way to provide guaranteed income. Always remember to do your due diligence and take into account what the industry experts have discussed in this article.