Displaying items by tag: retirement income

Demand for annuities has soared along with rising rates. Owners of annuities, prior to 2021, would be very happy if they purchased variable annuities which increase along with inflation, while those with a fixed annuity would see the purchasing power of their income diluted by inflation.

Despite the risks, annuities are a great option for clients with low levels of risk tolerance and who value the certainty of having an income. The biggest benefit is for clients who don’t want to worry about not having enough income, or how the financial markets are performing. 

According to Kirsty Anderson, the pensions specialist at M&G Wealth, “An annuity gives absolute certainty. You know exactly how much income you’ll receive, and you’ll receive this for the rest of your life – unless you’re purchasing a fixed term annuity.” Currently, the average annuity rate is 6.7%. This is nearly 50% more than the average rate since the financial crisis. 

There is a wide variety of annuities to fit the needs of clients. Some options include varying durations, flexibility, and protection against inflation. Many clients will opt for a blended approach, when they use annuities to cover basic living expenses while keeping the remainder of their money invested in the markets. 

Finsum: Annuity sales are strong due to high rates and nervousness about the economy and inflation. Here are some considerations for annuities in retirement planning.

Given their widespread popularity lawmakers have scrambled to put together a series of changes to a popular retirement product in the last year and it looks like more are coming. There appears to be bi-partisan support for the additions building on the 2019 Secure act which tried to increase retirement security. The House and Senate bills both include changes that would remove the maximum amount on the Qualified Longevity Annuity Contract. Previously it was capped at the minimum of $135,000 or 25% of your retirement accounts. The Senate provision also bumps the minimum up to $200,000. The new provisions also include auto enrollment in 401(k) plans and a student loan exchange in existing 401(k) plans. The final piece to the provisions is an increase in catch-up contributions for existing 401(k) plans that could further bolster retirement savings.

FINSUM: One of the underappreciated aspects of the Biden administration is the expansion of savings vehicles for retirees across many income earners.

Annuities are often disregarded for mental reasons. Frankly, many investors can’t stomach shelling out a large sum of money for a benefit far down the line, and that all bears out in the data, as deferred income annuities make up only 0.7% of annuity sales in 2020. But longevity annuities should be a consideration for many Americans in their portfolio, particularly for those who worry their finances won’t last. The CDC says Americans are living over 6 years older than in 1950 and that's a lot of accumulated income needed to be made up for. Longevity annuities come with a variety of benefits that integrate with your tax and 401(k) schedule.

FINSUM: The mental barriers of annuities are high but modern solutions like refund options and beneficiaries exist that can ease the traditional concerns of annuities.

(New York)

Here is a tough fact for clients to accept: the major of retirees will need long-term care as they age. From an emotional perspective, that is difficult to expect. From a financial perspective, it is even worse. The average cost of long-term care is between $53,000 to $105,000 per year. This presents a major funding challenge for retirees.

FINSUM: Advisors need to help clients come to terms with this likelihood. Long-term care insurance is a good option for this situation. This usually costs between $1,375 to $3,600 a year for a 55 year-old man, and between $2,150 and $6,4000 for a 55 year-old woman.