Displaying items by tag: income

In an article for the FinancialTimes, Moira O’Neill discusses the pros and cons of buying an annuity today. Annuities are increasingly on investors and advisors’ minds because many are now offering yields that are equivalent to long-term returns achieved by equities. Further, inflation is trending lower, while many believe that current elevated rates will prove to be transitory.

From a less quantitative perspective, annuities also offer peace of mind given that there is no variability in terms of returns regardless of what happens with the economy or inflation or monetary policy. This can be appreciated more in the current environment given the rising risk of a recession. 

Given that most annuities operate in perpetuity, a big factor in whether buying an annuity makes sense depends on an investors’ lifespan. The longer they live, the better an annuity will perform. And, this would certainly be the case if we go back to a low interest rate world which prevailed for much of the past 2 decades. 

For investors and advisors who believe that inflation is here to stay, buying an annuity doesn’t make sense. Instead, they should find better opportunities in other asset classes which tend to outperform in an inflationary environment. 

Finsum: Annuities are seeing major demand due to high interest rates, falling inflation, and increasing concerns that a recession is looming.

In an article for SmartAsset, Patrick Villanova CEPF discusses the pros and cons of investing for retirement in TIPS, Treasuries, and annuities. All of these are methods for retirees to generate income during their retirement. And, this is increasingly needed given that traditional pensions are being phased out of existence. 

TIPS are treasuries that are designed to protect against inflation. In essence, the yield is fixed, while the principal varies based on inflation. Some will create income through buying TIPS of different maturities, creating an income stream that is indexed to inflation. 

An annuity functions similarly but without the inflation component. Essentially, it’s a way to turn cash into an income stream. Treasuries are the most straightforward vehicle for saving, and it’s the benchmark that other methods are compared against. 

According to Villanova, the best strategy ultimately depends on a retiree’s lifespan and the rate of inflation. Assuming a moderate inflation rate of 2.5%, Treasuries would outperform annuities and TIPS slightly. If inflation returned to levels seen in the past decade, then Treasuries would perform the best. If inflation were to average 5%, then the TIPS strategy would handily outperform Treasuries and annuities.

However, annuities would handily outperform in the event that a retiree lives longer than 20 years. Given that the income of annuities is fixed, the value of this income would be diluted by higher levels of inflation. 

Finsum: Annuities, TIPS, and Treasuries are 3 of the most popular methods to create income during retirement. Patrick Villanova compares and contrasts each to see which is the best strategy for retirees.

Return flights.No return policy.

Well, whichever way you look at it, as the first half of the year hits the rearview mirror, you might say  fixed income has a take of its own. according to schwab.com.

The topsy turvy market aside, all signs are up on year to date returns in virtually every sub asset class of the fixed income market, Modest gains were posted by short term investments with low durations. Meantime, a duo of higher starting coupons and yields, which tracked south, boosted intermediate to long term bonds.

All that said, in 18 months, fixed income markets have been feeling their oats. 

That wasn’t the case last year, according to janushenderson.com. After all, that was in light of the central bank’s concerted monetary tightening. With that, yields rose sharply while the prices of bonds retreated. The feeling toward bonds these days? Markedly different.

Global flows into fixed income? Thumb’s up. Year to date, $152 billion entered fixed income funds, reported EPFR Global.

In an article for SmartAsset, Patrick Villanova clarifies some misconceptions about annuities and whether they are protected in the event that the insurance company which issued the annuity goes out of business. 

Annuities are essentially an insurance contract that offers a guaranteed income in exchange for payment. These can only be issued by insurance companies which means that there is regulation at the state level and protection for buyers. Unlike bank deposits, there is no federal guarantee.

In essence, each state has a guarantee organization, composed of insurance companies operating in the state. In the event of an insurance company going out of business, the organization will make sure that outstanding claims are good. 

However, it’s important to understand the exact amount that is protected. In most states, it’s up to $250,000 per person. More often, the failing insurer’s claims would be bought by competitors who would make good on the contract. 

Investors interested in an annuity should also check how various insurance companies stack up in terms of ratings by authorities. Typically, insurers with lower ratings will offer higher yields, reflecting the greater risk. 

Finsum: Annuities are seeing a surge in interest given higher yields and market volatility. Here are some points to understand about various risks and protections. 

In an article for Kiplinger’s, Jerry Golden discussed how running out of money is an investor and retiree’s worst nightmare, and how annuities can help address these fears. Retirees do face challenges such as uncomfortably high inflation, soaring healthcare costs, and concerns about the viability of social payments. 

Therefore, investors need to have a solid plan to ensure that there remains steady and sufficient income on top of Social Security and other potential pension payments. The goal should be to have a growing and guaranteed income that continues throughout all types of economic circumstances. 

One suggestion for retirees with these fears is to use a more conservative withdrawal rule rather than the standard 4%. This will give an increased margin of safety and boost your portfolio’s resilience. 

This is difficult and not practical often in reality. A better approach is to integrate financial products in the portfolio which reduce risk and dampen portfolio volatility such as income annuities. 

Having an income reduces the odds of money ‘running out’ by a significant degree while also allowing retirees to let their portfolios continue to work and grow. Often, fear is an impediment for retirees from achieving their financial goals, because they are unwilling to stick to the plan through difficult conditions.

Finsum: Running out of money is every retiree’s worst fear. Annuities are one way that retirees and advisors can address these fears.