Annuities have a bad reputation among some people — but not necessarily a well-deserved one. A variable annuity with broad investment choice, valuable product features and low fees can help you achieve your retirement income goals.
The two primary types of annuities are “fixed” (or guaranteed) and “variable.” In fixed or guaranteed annuities, the funds are invested in the insurance company’s general account, which typically contains fixed-income securities like bonds. The issuer, not the contract owner, assumes all investment risk. Fixed annuities offer a guaranteed payment, with the payout amount based on the assumed future returns of the investments and the annuitant’s life expectancy. The payment can be fixed for life, or can allow for future increases. Variable annuities provide the contract owner with the ability to invest in both fixed-income and stock-based accounts whose values change depending on the performance of these underlying investments. While variable annuities offer the potential for higher long-term returns than fixed annuities, generally their payouts will fluctuate (sometimes dramatically) from year to year. Unlike with a fixed annuity, the contract owner of a variable annuity assumes all investment risk.
Reality: Annuities can provide a wide range of flexible arrangements such as fixed and variable account options, a variety of ways to receive annuity income and guaranteed periods. Also, when funding your retirement, note that annuities don’t necessarily have to be an “all or nothing” choice. Depending on your financial goals, you can combine an annuity with lump-sum or systematic withdrawals, or other ways to receive your money, to create an income strategy that’s tailored to your needs. In fact, some studies show that combining an annuity with other income options can provide a better way to fund your retirement than selecting either an annuity or some other income option.
For example, some people in the early years of retirement may initially need less income (especially if they are working part-time or phasing into retirement), and more income later on as they get older. If you are in this situation, one strategy could be to use some of your retirement savings to purchase an annuity to meet basic monthly expenses while keeping the rest of your money in savings or investments from which you can take withdrawals to meet any additional financial needs.
For retirees who have specialized income needs, another option is a fixed-period or period-certain annuity. In contrast to a life annuity, a fixed period annuity makes regular payments over a specific number of years. When the fixed annuity period ends, the annuitant will have received all of his or her principal and earnings, and the annuity payments will stop. A fixed period annuity may be a good option in cases where you have other sources of lifetime income and want to supplement your income for a specific period of time; you’d like regular income for a specific period of time until you begin receiving lifetime income from another source; or you or your annuity partner is in poor health and you want a regular income for a limited time period.
Reality: It’s true that once you annuitize, the decision to receive payments through an annuity is irrevocable — you cannot, for example, transfer the money out of the annuity and put it into another investment vehicle such as an IRA. However, provided your annuity offers a sufficiently broad range of investment options, you can modify your investment strategy in response to market conditions or changes in your personal financial situation by reallocating your assets among the different investment accounts.
For example, as you grow older, you might decide you’d like a steadier income stream. You can take some of the annuity income you are receiving from more volatile investments such as stock (equity) accounts and transfer it to more conservative investment choices such as fixed-income accounts. Conversely, if you’d like to increase your exposure to equities, you may want to transfer money from more conservative asset classes like fixed-income and money market to stock accounts. No matter what your retirement investment goals are, note that an income stream that’s well diversified among different asset classes such as stocks, bonds, real estate and guaranteed accounts may provide a more stable income (in inflation-adjusted dollars) than if you have most or all of your investments in a single asset class. (Of course, diversification cannot eliminate the risk of fluctuating prices and uncertain returns.)
Reality: While it’s true that some annuities may charge high fees and other expenses, there are a number of lower-cost annuities available in the market. Therefore, if you’re interested in purchasing a variable annuity, shop carefully and look closely at the sales loads, mortality fees, surrender charges and other fees that a given annuity charges. Also, take the time to understand the different features available through any annuities you investigate and the prices for these features. Also, learn about the annuities’ fees, surrender charges, investment options, and performance track record (although an account’s past performance is no guarantee of future results). You can learn a great deal about an annuity and its features by reading the annuity’s prospectus for variable annuities or by visiting the website of the financial company that’s offering it.
Annuities are contracts sold by insurance companies that are designed to provide regular payments to the contract holder (also known as the annuitant) and his or her annuity partner (if there is one). The basic principle behind annuities is simple: a number of different annuitants provide funds, either in a lump sum or through regular premium payments, to an insurance company which issues the annuity contracts. This creates a pool of assets that the insurance company manages to generate payments to the annuity owners. With any annuity, all payments are based on the claims-paying ability of the insurance company.
Please keep in mind that guarantees are subject to the claims-paying ability of the issuing company and do not apply to any underlying investment options.
Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk, including possible loss of principal. Withdrawals prior to age 59½ may be subject to a 10% federal tax penalty on earnings, and surrender charges may apply in the early years of some contracts.
Payments from the variable annuity accounts are not guaranteed and will rise or fall based on investment performance. Mutual funds do not offer the range of income options available through annuities.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.
An annuity can help make meeting your retirement goals simple.