Market volatility, inflation increases annuities

If the recent downturn in the stock market has you panicking about your retirement savings, an annuity can give you peace of mind and protect you from major market fluctuations if used properly, some financial advisors say.

That’s why annuity sales are on the rise. Second quarter sales are expected to be higher $74 billion, record setting, according to life insurance research firm LIMRA. That would be more $5 billion above the historical record set during the financial crisis in the fourth quarter of 2008.

Writing products are driven by fixed income, which is expected to be in the middle $25 billion and $30 billion, about 75% from the first quarter. They work like CDs, giving investors a fixed rate of return on their money over time, but the interest rate on an annuity is usually higher than on a CD.

“It’s almost a perfect storm right now,” he said Todd Giesing, LIMRA’s head of annuity research. “Prices are going up so you can get more out of it, and on top of that, the stock market is volatile. People are looking for security and guaranteed prices.”

Variable and index are the other two main types of annuities that make up the majority of annuity sales. Fixed annuities are considered safer because you cannot lose the principal, and variable annuities are considered riskier because they move with the markets. An indexed annuity is considered somewhere in between.

What are annuities?

They are contracts with insurance companies to pay you regularly, starting immediately (immediately) or later (delayed). You can buy a partial annuity $10,000 in cash or periodic payments called premiums.

A guaranteed lifetime annuity “would be great if you’re worried about outliving your savings because it can give you guaranteed income for the rest of your life, even if you’re 100 or 120,” Adam PolitzerAthene senior vice president of Product Actuary, said.

Some also have a death benefit so if you die before collecting on the annuity, your heirs receive the amount you contributed, plus your income, minus any money you made.

“We typically sell annuities to younger clients with longer investment horizons who want to make their retirement income tax-free,” he said. “We also market to early retirees who want to make sure they don’t use up their savings.”

What are its benefits?

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Annuities, sometimes called “longevity insurance,” ensure that there is enough money to support late retirement.

It’s a good idea to plan for a long retirement because the benefits aren’t paid out until you start withdrawing or you’re receiving periodic payments, although withdrawing before age 591/2 can be subject to an additional 10% tax.

Unlike a 401(k) or IRA, there are no limits on your annual contributions. “If you’re already contributing more money to other retirement plans, such as an IRA or 401(k), an annuity can be a great way to increase your savings in an informal way,” Politzer said.

What are its benefits?

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With this, you can invest more money in an annuity and start making payments right away to increase your balance.

You also pay taxes on the portion of your annual salary that is treated as dividends, not the principal, or capital gains that are taxable income.

Once you’ve decided whether you want a residual or immediate annuity, consider what you want from your annuity.

A fixed annuity ensures that you will receive a high rate of return on your investment and receive regular payments.

A variable annuity works in a similar way to a 401(k), allowing you to choose investments — called “separate accounts” — that match your income. Returns and payments vary depending on the movement of the money market. However, they may offer death benefits, and payment plans that guarantee lifetime benefits and premiums can be very high.

An indexed annuity is a hybrid of fixed and variable. It is pegged to an index such as the S&P 500, offering guaranteed returns (such as bonds) and payments linked to a market index (such as equities). However, losses based on market indices are relatively low. In exchange for that protection, the potential benefits are also reduced. Between the two, the annuity group can move in and out less than the market, meaning less volatility.

Are there any downsides?

For one, they can be expensive.

The Securities and Exchange Commission warns of different payments on different annuities, for example. These include early cash-out fees, administration fees, premiums and premiums, and other fees related to things like long-term insurance that you may choose to add.

Variable annuities also move in line with the markets so they don’t offer much protection against a downturn.

Fixed annuities do not adjust for inflation, which can hurt your returns. With a fixed rate, you also run the risk of missing out on higher prices, as people expect this year if you close now.

Insurance companies buy them a price so you have to take their word for it and believe that the company remains solvent. State insurance commissions, not a Federal Deposit Insurance Corp., control and verify them. Therefore, check with your state insurance agent to make sure the broker is registered and licensed to sell annuities in the state.

Are annuities worth it?

“Everything can be beneficial if used properly,” Josh Simpsonvice president of operations and financial advisor and Lake Advisory Group in Lady Lake, Florida, he said. “No one should put all of their money in an annuity. Everyone should be diversified. But if you don’t have an annuity and all of your money in an IRA, maybe consider one.”

But like anything else, make sure you read the fine print. Annuities can be complicated and involve many costs that must be considered.

“Take a hard look at what the law does for them,” Simpson said. “And don’t talk to an insurance company to buy one. Talk to an independent insurance agent and ask them if they are reliable. If they say yes, go and talk to them. The first consultation shouldn’t cost money.”