Annuities are nothing new; in fact, they’ve been around since Roman times, and maybe even before that.1 But they’re seeing a modern-day surge in popularity, fueled by pre-retirees and retirees concerned about stock market volatility and outliving their retirement income.
The fixed annuity market experienced significant growth between 2017 and 2018, with a 25 percent increase in sales to a record $132 billion. The uptick in sales of fixed annuities is largely attributed to volatility in the equity markets. Regardless of how well the stock markets perform on a day-to-day basis, in the long run, retirees tend to be attracted to guaranteed income solutions.2 Keep in mind that annuities are insurance contracts designed for retirement or other long-term needs. They provide guarantees of principal and credited interest, subject to surrender charges. Annuity guarantees and protections are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
One key feature of a fixed income annuity is its flexibility in receiving income payouts. For example, the owner can choose to receive payouts for both spouses, even if one passes away before the other.3 If you’d like to learn more about income annuities, we can explain the various types that are available and help evaluate if and which one might make sense as part of your overall retirement plan.
The federal government also is recognizing the benefits of annuities, with legislation in the works that is designed to make them more available to average Americans as a way to help prevent them from running out of money during retirement. A new bill, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), recently passed in the House by a large majority and is expected to make its way through the Senate by year end. 4
One of the key features of the SECURE Act is to increase annuity options inside retirement plans — particularly those sponsored by employers — by reducing liability concerns when it comes to choosing an annuity provider for the plan.5
Individuals might consider utilizing an annuity option with other sources of retirement income, such as an employer-sponsored pension. Some pensions may offer either a lump sum or annuitized income for life. It’s important that you consider two particular issues: (1) your health and longevity genes and (2) the underlying entity that insures your pension. Some pensions are underfunded and therefore at higher risk of not honoring promised benefits over the long haul. Pensioners may even want to consider taking a lump sum and then using those assets to purchase their own annuity with a more reliable issuer.6
If you luck out and happen to win the lottery, this is another scenario in which you may choose between a lump sum or an annuity. In this case, consider that lottery payouts are subject to state and federal income taxes. Depending on your age and other factors, it may be prudent to spread out payouts via the annuity option.7
As with any annuity purchase, it’s always a good idea to seek professional financial advice before making a decision.
Content prepared by Kara Stefan Communications.
1 Stan Haithcock. MarketWatch. June 4, 2013. “Do as the Romans did — with annuities.” https://www.marketwatch.com/story/do-as-the-romans-did-with-annuities-2013-06-04. Accessed July 16, 2019.
2 Greg Iacurci. Feb. 20, 2019. “Fixed annuity sales smash previous record.” https://www.investmentnews.com/article/20190220/FREE/190229989/fixed-annuity-sales-smash-previous-record. Accessed July 16, 2019.
3 Marvin H. Feldman. Life Happens. March 29, 2019. “Looking for a Guaranteed Income Stream for Life? Think Annuities.” https://lifehappens.org/blog/looking-for-a-guaranteed-income-stream-for-life-think-annuities/. Accessed June 28, 2019.
4 Jamie Hopkins. Forbes. May 24, 2019. “8 Major Ways The SECURE Act Could Impact Your Retirement Plan.” https://www.forbes.com/sites/jamiehopkins/2019/05/24/8-major-ways-the-secure-act-could-impact-your-retirement-plan/#35cced1f3437. Accessed June 24, 2019.
6 Liz Weston. NerdWallet. June 19, 2019. “Pension Lump Sum or Annuity? How to Decide.” https://www.nerdwallet.com/blog/investing/lump-sum-annuity/. Accessed June 28, 2019.
7 Investopedia. May 17, 2019. “The Lottery: Is It Ever Worth Playing?” https://www.investopedia.com/managing-wealth/worth-playing-lottery/. Accessed June 28, 2019.