Last week, we discussed the challenges retirees face due to inflation and taxation. In this blog, we’ll look at longevity risk and one possible solution.
Of the future challenges, which should be of most concern? Perhaps it is the possibility that your clients might live so long as to one day outlive their assets.
Consider that in 1900, the approximate life expectancy was 45 years. In 1990, it had increased to 75. Because of the advances of science and medicine many of us can now expect to spend 20, 30 or more years in retirement. In fact, one of the fastest growing groups in America are the so-called “centurions”—people living beyond age 100. With this increased longevity comes the risk of depleting your clients’ assets during their lifetime and possibly outliving their income.
When considering the effects of inflation, volatile interest rates and financial markets, taxation and the possibility of outliving one’s income, we must wonder if there is a product that can help meet these challenges.
Fortunately, the answer for some of your clients may be the tax-deferred fixed annuity. Fixed annuities provide a minimum guaranteed interest rate.
Generally, traditional fixed annuities guarantee a higher interest rate for one year; after that, the rate can fluctuate throughout the life of the contract, but it can never fall below the minimum guaranteed rate.
This minimum guaranteed interest rate can provide an attractive alternative when interest rates and the equity markets are particularly volatile.
One form of a fixed annuity is the equity indexed annuity that provides the opportunity for gains linked to an index such as the S&P 500, but with no market risk to principal. If the structure of the equity indexed annuity does generate earnings in addition to the minimum guarantees, those earnings could help offset the effects of future inflation.
The withdrawal options of annuities are also uniquely suited to help deal with the possibility of outliving our assets. At maturity, your clients may decide to withdraw the money that they’ve accumulated in their annuity all at once. Or, they could select from a variety of retirement income options.
Peace of mind
One option will guarantee a monthly income for as long as they live. A guaranteed lifetime income can go a long way to providing the peace of mind needed to enjoy many future retirement years. Plus, annuities provide an opportunity for tax-deferred growth.
The income tax on their annuity’s interest earnings is deferred until they choose to access their savings. This means that as long as the money stays within the annuity they have the triple advantage of:
- Earning interest on their premium,
- Earning interest on their interest, and
- Interest on the money that they would otherwise have paid in current taxes.
Fixed annuities can help your client deal with volatility by providing additional opportunities for diversifying their investments. If your client’s investment portfolio relies too heavily on higher or moderate-risk investments, the safety and guarantees of fixed annuities can provide an excellent alternative.
People determined to place all of their savings only in vehicles that provide safety of principal can look upon fixed annuities as an option for even greater diversification among safety oriented investments.