Fixed annuities fell out of fashion when the stock market was rising, but are getting a second look these days from investors whose retirement accounts were battered when stocks tumbled.
“This economy has caused people to fear outliving their money,” said Carrie Coghill Kuntz, president of wealth management firm DB Root Co., Downtown. “An immediate annuity takes away that fear because the insurance company promises to pay until a person dies.”
Unlike variable annuities, which pay an income that rises and falls based on the value of mutual funds, a fixed annuity is a contract in which an insurance company makes a consistent payment to the investor until he or she dies. The insurance company guarantees both the earnings and the principal. Insurers are willing to assume the risk because they plan to invest the annuity premium in long-term government securities, stocks and corporate bonds that yield a higher rate of return, making a profit on the spread.
“My goal with my clients is simplicity. I don’t want to have to apologize to them,” said David Reindel, a financial adviser in Mystic, Conn., and author of “Don’t Die Broke.” He said not one of his nearly 500 clients who are retired or about to retire has money invested in the stock market.
“We lay out a plan and they know what will happen as long as they follow the rules. Most people are not saving for retirement in a guaranteed manner where they have some certainty of what the number will be in the end,” he said. A general guideline that financial planners use when estimating how much of a retirement nest egg can be safely withdrawn each year is 4 percent. Any amount higher could put an investor at risk of outliving the money saved.
Fixed rate annuities may eliminate that worry. Typically, a 60-year-old person who purchases a fixed annuity can get a lifetime guarantee of about 5 percent of the amount invested on an annual basis. A 70-year-old person could get about 6.5 percent a year.
But the lifetime guarantee is only as good as the full faith and credit of the insurance company making the promise. The broad declines that have occurred in several markets such as stocks, bonds and mortgage-backed securities, have also wiped out investment returns that insurance companies are relying on to help them make annuity payments.
Life insurers may be next in line to receive federal funding from the Troubled Assets Relief Program. “You have to ask yourself, where is the insurance company putting my money to generate the guarantee?” Mrs. Coghill Kuntz said.
Annuities can provide financial security in uncertain times, but they are not suitable for everyone. Investors in their 20s and 30s would not benefit as much from annuities because they have many years to absorb market declines. Likewise, the extremely elderly should avoid them because they might never realize the benefits. The best ages for buying annuities is from the late 30s up to the ideal age of 55, all the way to 75.