Is Your Annuity Working for You in Retirement? – Key Reasons to Reevaluate Now

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When was the last time you reviewed your annuity? If you’re like many annuity holders, it might have been a while. With interest rates at all-time highs and significant economic changes on the horizon, now is a crucial time to take a closer look at your annuity. In this blog, we delve into why reevaluating your annuity is essential and the key reasons it might be time for a change. 

The Current Economic Landscape 

Interest rates have experienced a dramatic increase recently, benefiting not just banks but also insurance companies and, by extension, your annuities. The economic environment is dynamic, and keeping your financial products up to date with these changes is crucial. Here’s why a review of your annuity is more important now than ever. 

  1. Interest Rate Changes

The primary reason to reevaluate your annuity is the significant shift in interest rates. Just a few years ago, interest rates were incredibly low which made any fixed-income investment, (including annuities) less attractive. Fast forward to today, and the Federal Reserve has implemented 11 interest rate hikes between 2022 and 2023. This increase has opened new opportunities for better returns on annuities. 

If your annuity was purchased in a low-interest-rate environment, its growth potential might be limited compared to newer products available now. For example, an annuity purchased in 2017 when bank rates were near zero might not be performing optimally in today’s environment where banks offer around 4% interest. 

Reevaluating your annuity could reveal opportunities to switch to a product that leverages current higher interest rates, potentially earning you significantly more in the long run. Even if there’s a surrender charge for early withdrawal, the long-term benefits might outweigh the costs. 

  1. Inflation Rates

Higher inflation rates impact everything from food costs to the purchasing power of your retirement income. If your annuity includes a lifetime income rider, now is the time to assess whether it will meet your future income needs, given the current economic climate. 

Inflation can erode the real value of your fixed income. By evaluating your annuity, you might discover that switching to a newer product with better terms could substantially increase your guaranteed income, helping you keep pace with inflation. We’ve seen cases where clients were able to boost their guaranteed lifetime income by 20% just by moving to a new annuity with better terms. 

  1. Unnecessary Riders

Riders can add valuable features to your annuity, such as guaranteed lifetime withdrawal benefits. However, they often come with additional costs. Over time, your financial situation might change, making some of these riders unnecessary. 

For instance, if you’ve significantly increased your savings or received an inheritance, you might no longer need a guaranteed lifetime income rider. Removing unnecessary riders can reduce your costs and potentially increase your annuity’s growth potential. 

Consider whether the features you initially paid for are still relevant. If not, eliminating them can streamline your annuity and enhance its efficiency. 

  1. Life Event Changes

Major life events, such as changes in marital status, employment, or health, can significantly impact your financial needs. These changes might mean that the annuity you purchased years ago no longer aligns with your current situation. 

For example, a change in health might alter your retirement income needs, or a shift in employment status could affect your overall financial strategy. Reevaluating your annuity considering these life changes ensures it remains a suitable part of your financial plan. 

Understanding Surrender Charges and Bonuses 

One common concern when considering an annuity change is surrender charges. These are fees for withdrawing from an annuity before a specified period. While surrender charges can be significant, it’s essential to consider the overall financial picture. 

Insurance companies often offer bonuses to entice you to move your annuity to them. These bonuses can offset surrender charges, making the switch more financially feasible. For instance, if your current annuity is worth $100,000 but has an 8% surrender charge, you might hesitate to move it. However, if the new annuity offers a 10% bonus, your new balance could be $101,200, more than covering the surrender charge. 

It’s crucial to work with a financial advisor to crunch the numbers and determine whether moving your annuity is beneficial. The goal is to ensure that any move makes sense financially and aligns with your long-term goals. 

The Importance of a Personalized Review 

Everyone’s financial situation is unique, and there’s no one-size-fits-all answer when it comes to annuities. That’s why it’s essential to conduct a personalized review with a financial professional who understands your specific needs and goals. 

A thorough review should include: 

  • An assessment of your current annuity’s performance. 
  • An analysis of how changes in interest rates and inflation affect your annuity. 
  • An evaluation of the relevance and cost of any riders. 
  • Consideration of any recent life events that might impact your financial strategy. 

Take Action Today 

If you haven’t reviewed your annuity recently, now is the time to act. With interest rates and inflation impacting your financial landscape, ensuring your annuity aligns with your current and future needs is crucial. 

A personalized review can provide valuable insights and uncover opportunities to optimize your annuity. Whether it’s switching to a product with better terms, eliminating unnecessary riders, or adjusting for life changes, taking action today can set you up for a more secure financial future. 

If you would like to have a conversation about your annuity situation, or you just have a question about annuities, we’d love to hear from you! Schedule your complimentary call with us to get started. 

By incorporating these strategies and regularly reevaluating your annuity, you can ensure that it continues to serve your financial needs effectively. Don’t let your annuity become outdated – take control of your financial future today. 

June 3, 2024 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 3, 2024

CLICK HERE TO WATCH THE UPDATE

Annuitization Versus Deferred Annuities in Retirement

Radon and Murs discuss the concept of annuitization and immediate annuities versus deferred annuities. Annuities can come from different sources, such as insurance companies or municipal pensions. Listen in to learn how immediate annuities work, their pros and cons, and risks such as the potential loss of the principal if the annuitant dies early. You will also learn how…

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Annuitization Versus Deferred Annuities in Retirement

Learn how deferred annuities work, the fixed type of deferred annuities, and why they make more sense for retirement planning than immediate annuities.

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Understanding Annuitization Versus Deferred Annuities

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When planning for retirement, many clients ask us about annuitization and how it compares to deferred annuities. This topic often causes confusion, so we aim to clarify the differences and benefits of each option to help you make informed decisions about your retirement income. 

Types of Annuities 

There are two primary types of annuities: 

  1. Immediate Annuity: You invest a lump sum of money and start receiving payments almost immediately. 
  1. Deferred Annuity: You invest over time, allowing your money to grow before you start receiving payments. 

What is Annuitization? 

Annuitization means converting your investment into a stream of income. This process allows you to secure a reliable income during retirement. However, it’s important to understand the specifics: 

  • Lump Sum to Income: You provide a lump sum to an insurance company, which then guarantees a regular payment for life. 
  • Risk and Reward: If you live longer, you benefit from a steady income. If not, the remaining funds typically do not go to your beneficiaries. 

Example Scenario: 

  • You invest $100,000 into an immediate annuity. 
  • The insurance company calculates that you will receive $500 monthly for the rest of your life. 
  • If you live a long time, this can be advantageous. If not, the insurance company retains the remaining funds. 

Adding Protections to Your Annuity 

To mitigate the risk of losing your investment early, you can add protections: 

  • Joint Annuitization: Adding a spouse as a beneficiary ensures they continue to receive payments after your death, albeit at a reduced rate. 
  • Period Certain: Guarantees payments for a specific period, even if you pass away early, ensuring your beneficiaries receive the income. 

Immediate Annuities: Considerations 

Immediate annuities can provide peace of mind with guaranteed income but may not always be the best financial choice. For instance, one client needed to live until 102 to break even on their investment. While it provides security, it might not offer the best return on your money. 

Security vs. Growth: 

  • Peace of Mind: Immediate annuities offer the security of a fixed income, which can be comforting for those worried about outliving their savings. 
  • Limited Growth: However, the lack of growth potential means that your money doesn’t work as hard for you. For those who have saved diligently and are financially secure, this might not be the most efficient use of their funds. 

Deferred Annuities: A Balanced Approach 

Deferred annuities offer more flexibility and growth potential compared to immediate annuities, making them suitable for good savers who want to maximize their retirement funds. They come in two forms: 

  1. Fixed Deferred Annuities: Provide a safe place to grow your money with predictable returns. 
  1. Variable Deferred Annuities: Offer the potential for higher returns but come with more risk. 

Fixed Deferred Annuities: 

  • Predictable Returns: These annuities grow at a fixed rate, providing stability and peace of mind. They are ideal for conservative investors who want to avoid market volatility. 
  • Indexed Growth: Some fixed deferred annuities are linked to an index like the S&P 500. This allows you to benefit from market growth without exposing your principal to risk. For example, if the S&P 500 performs well, your annuity’s value increases, but if the market underperforms, your principal remains protected. 

Variable Deferred Annuities: 

  • Higher Potential Returns: These annuities invest in a variety of sub-accounts, similar to mutual funds. While they offer the potential for higher returns, they also come with increased risk. Your returns will vary based on the performance of the underlying investments. 

Making the Right Choice 

Choosing between annuitization and deferred annuities depends on your unique financial situation and retirement goals. Here are some key considerations: 

  • Financial Goals: What are your primary financial goals for retirement? Are you looking for security and a guaranteed income, or are you willing to take on some risk for the potential of higher returns? 
  • Risk Tolerance: How comfortable are you with market volatility? Fixed deferred annuities offer stability, while variable deferred annuities come with more risk but also higher potential rewards. 
  • Life Expectancy: How long do you expect to live? This can impact whether an immediate annuity makes sense for you. If longevity runs in your family, an immediate annuity might be more attractive. 

We recommend discussing your options with a financial advisor to determine the best strategy for you. Our team is here to help you navigate these decisions and find the right solution for your retirement plan. 

Ready to explore your options and secure your financial future? Click here to schedule a 15-minute call to discuss annuities and your retirement plan 

July 17, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for July 17, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Annuities or CDs – What You Should Consider

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the similarities and differences between annuities and CDs and the best one for retirement planning. In as much as CDs and fixed index annuities are similar, CDs are best suited for short-term investments, while annuities are best suited for long-term investments.

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This Week’s Blog – Annuities or CDs – What You Should Consider

“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

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Annuities or CDs – What You Should Consider

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“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

Wait. CDs? They’re No Good, Right?

We haven’t talked about CDs for a long time. Interest rates weren’t that attractive in past years. Most people were lucky to receive 1% to 2% returns. Clients who want to reduce market risk can, at the time of posting this article, go out and get a 1-year CD at 5.5%, or a 5-year CD at 4.5%.

With returns like this, we have a lot of people questioning why they would put their money into an annuity – especially a fixed annuity.

First, we need to consider putting the funds into the right place for your retirement focused plan. You have a lot of options when investing, including the following three main categories:

1. Growth

You can put your money into growth assets, such as equities, because they have the highest return potential. These assets would include things like ETFs, stocks, and mutual funds.

These funds need to remain in the market for some time and have the risk of volatility. Markets go up and down all the time, and your funds will follow this trend, too. You do have the potential to lose money with equities, but we do have controls in place to limit these potential losses.

2. Safety

If you want to have a good rate of return without the risk of losing money on it, you’re now in the following territory:

  • CDs
  • Treasury Bonds
  • Fixed Annuities

These investment vehicles protect you from market losses, so you don’t need to worry about that, but you may earn less with a fixed option.

3. Cash

Easy money access. If you need liquidity, this is the avenue that you’ll want to choose because it gives you access to the money without penalties when you need it. However, you will not receive a high rate of return.

 Keeping this in mind, we’re going to expand on the second category, “safety”, because that’s where the discussion of CDs vs. annuities really exists.

Interest Rate Risks of CDs and Annuities

CDs and annuities are the “hot topic” right now. Interest rates have gone up due to inflationary measures and banks are now able to offer better rates on CDs than they have in a long time. The Fed’s goal is to tame inflation, and when it does go down, interest rates will also come down.

If you buy a CD today at 5% and allow it to reach maturity, you can choose to:

  • Take the money and put it back in a CD
  • Take the money out and put it into other investments

CD renewals will allow you to buy the CD again at current market rates. It’s very likely that rates will come down and you may have a CD rate of 3.5% or 4% at renewal – or lower. Two years from now, CDs may be 2% or 1.5%.

These lower interest rates are your “reinvestment risk”.

We like the idea of putting a portion of our client’s money into the six-month or one-year CDs, if they know they’ll use these funds in the next year and will need to access them. In the meantime, they will receive a nice return on their investment.

Fixed Indexed Annuities and Their Potential 

Fixed Indexed Annuities (FIAs) are driven by interest rates, so just like CDs, the interest rates have gone up in the last year. The key difference between a CD and an FIA is the length of the contract you receive. For an annuity, the term is longer, such as 10 years.

You may receive a 4.5% – 5.5% interest rate on CDs for 1 year or more. Over the past 10 years, FIAs with no riders or fees have had returns of 4% – 6%. Compared to CDs, this range for annuities was much higher.

In today’s market, because of higher interest rates you can receive an FIA that averages 5% to 10% over a 10-year period. However, you may have some years with 0% returns.

How does that work?

Annuities are linked to an index. For example, S&P 500:

  • S&P 500 rises 10%, so you earn 10%
  • Next year, the S&P 500 drops over 10%. Since you are protected from market losses in an FIA, you do not lose any money in that year.

Fortunately, FIAs often have many index options that allow you to diversify your potential and gain more opportunity.

We believe FIAs are really a bond alternative, as they are both conservative and protect against risk. Bonds in 2020 – 2022 hurt portfolios more than they helped.

Clients often look to bonds to make 3% – 5%, but FIAs offer:

  • Greater return opportunities
  • Principal Protection (protection from market losses)

Of course, if you have money that you want to park for a year and then use the money, put it into a CD and make your 5% return. However, for long-term investments and the potential to make more money, it often makes better sense to go with an annuity.

Annuities are longer-term, but the reward is more consistent. CDs are shorter-term and, while they have their place today, will see rates go back down as inflation falls and interest rates follow.

Do you want to read more about how to secure your retirement?Click here to view our latest books covering this topic, or schedule a call with us.