When it comes to retirement income, investors are famously unprepared, but that trend might be changing: Willis Towers Watson’s 2016 Global Benefits Attitudes Survey found 59 percent of millennials and 66 percent of Baby Boomers are willing to pay a higher amount for a guaranteed retirement benefit.
And who can blame them? A variety of studies and surveys show that people with guaranteed income tend to be happier in retirement than those without. But with Americans living longer and longer, there’s an increased risk of retirees outliving their retirement nest egg.
Equities, fixed income and other investment products are not substitutes for guaranteed income, and that’s where annuities come in. With its well-defined stream of income, an annuity can often provide more peace of mind than increased returns.
“The right way to think about longevity annuities is as insurance rather than as an investment,” said Katharine Abraham, director of the Maryland Center for Economics and Policy at the University of Maryland and co-author of an annuity study for the Brookings Institution. Once that peace of mind is established, many investors are more likely to consider more risky investments. So, a variable annuity might be even more attractive because of its blend of minimum guarantee and upside potential based on the market.
Relief from tax pressures
For many investors, taxes are rising at both the state and local levels. When used strategically, variable annuities can provide beneficial tax treatment; a low-cost annuity will enhance and compound the benefits of tax deferral, especially for high-income earners. The combination of deferred taxes and low expense costs can outweigh the challenges of income taxation within a few years, as opposed to the decades it once took to recoup the benefits of tax deferrals.
A safe investment that achieves individuals’ goals
Annuities have a unique and valuable advantage that investors simply can’t duplicate when investing on their own. This can give annuities an advantage over 401(k)’s: Because these particular investors are seeking rest-of-lifetime income, they would have to stick with low-risk investments to protect against dips in the market. That alone takes some of the gleam off other investment options, which could offer greater benefits, but also come with increased risk.
Immediate annuities generally provide more lifetime income than investors could get by following the “4 percent rule” or a similar strategy of systematic withdrawals, according to income expert and former U.S. Treasury Department official Mark Warshawsky.
Annuities have a flexibility that makes them attractive for variety of investors. (Photo: iStock)
The option to guarantee a recoup of investment
Here’s an example of the flexibility provided by annuities: A deferred-income annuity provides a cash refund for heirs, which can overcome an investor’s hesitancy to select an annuity because he/she is concerned they won’t get the full benefit they paid for.
Then there are IOVAs. Also referred to as investment-oriented or investment-focused variable annuities, IOVAs are essentially stripped-down versions of more traditional variable annuities with features like living benefit riders. Because the additional benefit is relatively inexpensive for clients, the ability to pass along the full principal value to beneficiaries even in down markets could be an attractive feature, according to Mark Cortazzo, senior partner at MACRO Consulting Group.
Benefits stretch in the afterlife
Conversely, for couples, joint annuities allow a steady flow of income during each spouse’s lifetime and after the annuitant’s death. The joint life tables used in underwriting such annuities differ from individual life tables because the life expectancy of the second-to-die is often higher than that of an individual.
Compared with a single-life annuity, a joint or survivor annuity may pay out less, but these joint annuities are really about taking care of the spouse left behind, in a way that few other vehicles can manage.
Real benefits for high-net-worth investors
For high-net-worth investors, variable annuities are surprisingly attractive, and the benefits far outweigh the costs. High-net-worth individuals tend to be more focused on annuities’ contractual transfer-of-risk guarantee than on interest rates.
In some states, annuities are fully protected from creditors and frivolous lawsuits. And annuities pass outside of probate, so they can help with estate planning, which means they’re free from the lengthy process of concluding legal and financial matters. Many of the wealthiest investors use contractually guaranteed legacy strategies as a way to include annuities within their estate plan.
Clearly, for those investors focused on financial security throughout retirement, variable annuities can deliver in spades while offering the necessary flexibility to take care of investors’ loved ones and pad their own portfolio.
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AXA is the brand name of AXA Equitable Financial Services, LLC and its family of companies, including AXA Equitable Life Insurance Company (NY, NY), MONY Life Insurance Company of America (AZ stock company, administrative office: NY, NY), AXA Advisors, LLC (member FINRA, SIPC), and AXA Distributors, LLC (member SIPC).