One of the questions we have heard asked quite a bit lately, “Is it the right time to buy an annuity?”
A prolonged low interest rate environment does impact returns and interest crediting on annuities. Payouts, **guarantees and riders have all been impacted in the annuity marketplace during the last five years. In fact, one recent example showed that immediate annuity payouts were down about five percent from just eight months ago.
So, if you are considering an annuity — is this the right time or should you wait?
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Firstly, proper financial planning would indicate that a balance of assets and asset classes should be utilized in constructing a quality retirement plan. Many financial planners now utilize annuities as part of the fixed income allocation adding additional layers of security by eliminating longevity and credit risk. When it comes to providing income, annuities offer unparalleled combinations of safety and security when navigating through 20 to 40 years of retirement.
Secondly, if you are trying to time the market you may just end up guessing wrong. How can we guess wrong when the Federal Reserve has indicated they plan to keep interest rates at near zero levels until 2014? Only hindsight will be certain, but what are the costs to your portfolio when you park money in an account earning zero or stuff it in your mattress. While you may not lose principle you most likely will lose buying power. Inflation, which has averaged somewhere around four percent for about the last 30 to 40 years is sure to erode your future spending power.
However, nothing could be worse than losing principal and depleting your retirement savings just because you choose to stay invested in riskier asset classes due to a perceived lack of choice.
What is the best plan for when I prepare for retirement – NOW?
- Protect the Basics – If you are in or near retirement protect your income by selecting safe money options that provide reliable and steady income. Consider CD’s or annuities for this portion. Annuities are superior for providing income, while CD’s are federally insured.
- Spread out your assets – Look at all assets classes, not just stocks and bonds to provide diversification. You can spread out your risk by choosing assets classes than are not as heavily correlated to each other. Consider MLPs, REITs, preferred stock, commodities, currencies, options, carry trades and annuities.
- Take reasonable risks – Once you have protected your foundational level of income you can be more comfortable in engaging traditional more aggressive asset classes that can provide additional returns to combat inflation.
- Get a second opinion – Ideas and philosophies about financial planning are plentiful. Seek out professional advice and don’t be afraid to get a second opinion. When it comes to retirement planning some advisor are definitely better than others.
Lastly remember you are in charge, too often we hear from clients who say “I did not want to do that but my advisor said I should”… if you don’t like their advice or service. Get a new advisor. It’s your money and more importantly it is your retirement.
Annuity Guys® Video Transcript:
Dick: Today we have with us the new and improved Eric. He’s done a little shaving and he’s got that youthful appearance. Hey, we’re going to talk about annuity timing today and what is the best time to buy an annuity?
Eric: Yeah, it’s really we’re looking at today’s low interest rate environment. One of the questions we constantly get asked is “Is it the right time, or am I better off waiting?”
Dick: That’s the big question and I think that is the good thing about an annuity is that they are structured for income, and they’re not really structured just for the aspect, of treating them like a CD. So they’re more of a potentially, foundational place in your portfolio that can get you the higher income that you’re desiring even in a low rate environment. So I think that that’s just part of structuring an overall portfolio. What would you say, Eric?
Eric: Yeah, it’s about asset allocation, so when it comes down to it, you start with a plan. You can’t hit a target, you can’t see. So what’s your retirement financial plan? And then you start building from that, all right? We always talk about the foundation, taking care of the foundation and if income is part of the foundation, that’s really where annuity makes sense.
Eric: An annuity makes sense for fitting that income foundation portion, securing it so you don’t have to worry about running out of money.
Eric: One of the biggest concerns a lot of people we talk to have is with the rates being as low, you know…
Dick: Yeah, right, when is the right timing? And we do know, Eric. I mean it is a fact, if we keep money in a low-rate environment and we do nothing, put it in our mattress or put it…
Eric: Put it in a savings account.
Dick: When you put it in the bank it’s about like putting it in the mattress. It’s going to earn about the same amount of money, so we know that we’re not going to keep up with inflation.
Eric: Right, we know that zero is what we’re getting…
Dick: We know that our spending power is dropping, dramatically.
Eric: So if inflation’s averaging 4.0%, over the last 30 to 40 years, what are you getting when you put it in a zero-earning environment? You’re losing money. You don’t like to think of it as losing money, but you are.
Dick: Well by contrast, let’s just talk about for a minute, because we hear a lot about it. The hybrid annuity and what makes the hybrid annuity unique in this low-rate environment when it comes to income?
Eric: Well, it’s the income riders. You’ve got that **guaranteed return, sometimes as high as 8.0%, 7.0-8.0%, that those dollars can be used to **guarantee income in the future and that’s a way of securing income.
Dick: Right, it’s another layer of security that we’re really asking the insurance company to take that risk, instead of us taking the risk by going into riskier investments, we’re saying, “Hey, if I can grow my income base in a similar way, if I just put it in the stock market and tried to earn 8.0%, I mean I realize it’s not going into my cash accumulation account.” But if I can draw income off of it on a similar level that I could, if my stock account grew then that’s a way of transferring some of that risk.
Eric: Right and it’s about putting the right pieces or filling the right buckets. You want to have that secure portion taken care of, so then you can add those other allocations that can help you combat inflation, help you earn a little bit higher, because you’re taking care of your foundation.
Eric: So it allows you to take more risk in other areas.
Dick: Exactly, folks. I think that you can kind of understand that. That if you’ve got your income foundation very secure, you feel a lot more comfortable taking risk, or being more aggressive with that portion of your assets that’s more discretionary.
Eric: That’s really what we’re going after, so if you have somebody that you’re working with and, you have to be comfortable with your advisor.
Dick: Yes, you do.
Eric: First of all, get professional advice. It never hurts to get a second opinion.
Dick: No, no.
Eric: No matter, if you’re at the first stage or you’ve been investing and are ready for retirement, for a long time, you’re getting to that stage, ask for a second opinion.
Dick: Well, one of our slogans that we use quite a bit is, “Your Retirement Deserves a Second Opinion,” and it’s true. It’s really true.
Eric: We work with a lot of folks who had a very good accumulation specialist to get them to retirement.
Dick: Good strategy. They’ve earned well.
Eric: But when you get to retirement, you need to work with a retirement planning specialist and that’s where we would encourage people, to get that comfort level with your retirement plan.
Dick: If you do not feel comfortable with what is being proposed or the plan just doesn’t seem to make sense, get that second opinion. Don’t just go along, because how many times have we heard someone come in to us new and say, “Well, my advisor told me to do this.” Well, this is a reciprocating two-way street when you work with an advisor. We want our clients to tell us…
Eric: There has to be a comfort. There’s a relationship that you have to have with your advisor. If you cannot tell your advisor no, you’re working with the wrong guy or gal. Don’t want to be gender specific. But it’s about that relationship and letting them know where you feel comfortable and how you’re going to work to achieve, they’re going to work to achieve your goals, and you have to feel comfortable with that client.
Dick: And yet, Eric, there is that balance that we do know things that, because of our training, because of the way that we forecast, project and look at the way that these things interrelate, that there has to be a mutual level of trust and comfort between us and the client. That’s why they have us. We’re the professional. We know what we’re doing. We have the expertise. But they should never feel forced. You should never feel in some way that you’re being coerced into something.
Eric: Right, and if you don’t agree with the advisor’s assessment get a second opinion. That’s what it’s about. It’s about your retirement.
Dick: Have we fairly answered the question of annuity timing? Is it a good time to buy an annuity?
Eric: Well, I would tell you that it’s always the right time, if it fits the situation. You don’t wait until it’s too late.
Dick: Right, I do agree. I could say a lot more, but why don’t we…?
Eric: That’s a great gag line. Don’t wait until it’s too late.
Dick: That’s right. That’s right. Thank you.