With unstable financial markets, here’s why annuities are a less risky option


At this point, 2022 has been a year to remember, as have – ironically – some of my other favorite years like 2008 when the S&P 500 fell over 30% or 2002 when we saw a down 22%.

The significant market volatility we’ve seen this year — the S&P 500 stumbled on its worst first-half performance since 1970 — has many people looking for alternatives. The I-Bond, with its inflation-linked return, has garnered a lot of attention, but guaranteed fixed savings or income annuities have also become more attractive to many people. They may be simple, but they can be a reliable workhorse within a portfolio. Here’s a quick look at how they work and when they might be a useful addition to your retirement toolkit.

Savings annuities

Savings annuities are tax-deferred and ideal for someone who wants part of their portfolio to go only one way: up. With competitive interest rates and zero market risk, a savings annuity can be a great way to add a guaranteed component to your retirement portfolio. Taxes aren’t due on your interest until you withdraw the money, allowing for powerful compounding. The IRS allows tax deferral; therefore, an annuity is considered a retirement vehicle. As such, withdrawals made before age 59½ could be subject to taxes and penalties. Often people mistakenly believe that if they put money into a savings annuity, they will be required to withdraw the money through periodic distributions throughout their lifetime. Although this is an option, it is not mandatory. On the other hand …

Income annuities

Income annuities allow you to turn a lump sum into a stream of income over a number of years, your lifetime, joint lifetimes, or a combination of these. Some people may fear losing their principal if they were to die prematurely, but there is an option for that as well. For example, you could choose a payment for you and your spouse for as long as one of you is alive, with a premium refund option to ensure that you, your spouse or your designated beneficiary get back at least what you have. paid for the annuity. Essentially, it is a tool for building your own pension. If you’re worried about depleting your retirement savings too quickly, an income annuity can provide you with a “retirement check” that won’t outlive you. Ideally, a retiree’s basic expenses are covered by a combination of guaranteed income sources. When Social Security, military retirement, and company pensions aren’t enough, an income annuity may be a reasonable option to fill the void.

An annuity is meant to last a long time, which makes the financial strength of your life insurance company of utmost importance. If you’re looking for an alternative to all the “excitement” the markets provide today, it might be a good idea to explore annuities.

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