Annuities Offer Protection and Growth Potential

Annuities have always played a role in retirement planning, but with economic uncertainty and market volatility, their importance has boomed recently. They offer the chance for growth along with the protection of principal during market downturns which is supported by the claims-paying ability of the issuing insurance carrier.

While they can be a vital part of the retirement planning process, annuities can sometimes be overlooked by advisors who focus strictly on accumulation and stock market investments. For people getting close to retirement and those without the appetite or flexibility for stock market risk, annuities can be an attractive option to help guarantee income for life.

In fact, annuities were created for retirement; they were first invented during ancient Roman times to compensate retired soldiers. They’re meant to help you generate income once you stop collecting wages. There are many different types of annuities, but fixed and fixed indexed annuities are different than retirement accounts like 401(k)s and IRAs in that they are not subject to market risk, and they can offer guarantees based on the financial strength of the issuing insurance company.

In other words, fixed and fixed indexed annuities can offer a guaranteed income stream to eliminate some of the uncertainty that comes with retiring. It’s important to understand fixed and fixed indexed annuities are not investments, they are contracts. Even though they may credit interest based on market gains, they are not actually invested in the market at all. Fixed and fixed indexed annuities are contracts between you and the issuing insurance company, who again, based on their claims-paying ability, can guarantee your principal and sometimes offer participation in stock market upside.

One of the main concerns for many Americans approaching retirement is ensuring they have enough money to fund a secure and comfortable future. A significant portion of retirees worry about the possibility of running out of money during their retirement years. This concern is supported by research indicating that a substantial percentage of U.S. households may face financial challenges maintaining their lifestyle throughout retirement.

One of the biggest reasons retirees run out of money is sequence of returns risk. This can happen when clients withdraw money from accounts early in retirement in a down market. The withdrawals can then outpace the growth of the account, making it more likely that a person completely drains their funds while still living.

A fixed indexed annuity can help counter sequence of returns risk by offering a guaranteed lifetime income option. Under a properly structured fixed indexed annuity, the principal and the lifetime income benefit can both be protected, which can be beneficial in a market crash. They also can offer flexibility in diversifying your portfolio, as retirees with a guaranteed lifetime income benefit can keep other assets invested in the market, conceivably giving them a chance to wait out valleys and plateaus.

Some annuities are even designed to help combat inflation by offering a COLA, or cost-of-living adjustment.

While annuities are popular among those looking for more protection as well as growth potential, purchasing one can be treacherous without proper help. There are many different types of annuities, and they won’t all offer identical benefits or protections. For example, variable annuities are directly invested in the market and carry the same risk that any market investment would. There are pros and cons to each type, and innovative insurance companies are working to design new annuity products with enhanced benefits every year.