Retirement is changing, with pensions less common,
and increased market volatility the new normal.
You may ask whether it's still possible to have steady income in retirement that you can't outlive and the comfort that comes with it.
Annuities could be the answer.
There are different types of annuities and like all investments, each comes with its own pros and cons.
When used appropriately, they can be a powerful tool that offers unique benefits that can complement social security and the rest of your income strategy.
In this video, we are going to look at two types of annuities: immediate fixed annuities, sometimes known as income annuities, and deferred variable annuities. We'll give you the straight facts on how they work and what to look out for and then you can talk to your financial consultant to see if they're a good fit for you.
Immediate fixed annuities can be great if you're already retired and looking for immediate, reliable monthly income that won't vary with market fluctuations and doesn't require managing.
Here's how it works: You pay a lump sum, a premium to an insurance company, in exchange for monthly payments to last a specific period, such as 5, 10, 20 years or for the rest of your or your spouse's life.
The insurance company determines that amount of income you receive based on a number of factors, including life expectancy, interest rates, and the distribution options you selected.
You can choose to start receiving payments immediately.
Fixed annuities lock in a fixed payment amount. This provides guaranteed income that doesn't depend on market returns. So, you don't benefit when the market goes up, or lose out if the market drops.
There are some tradeoffs with an immediate fixed annuity. If, for example, while protected from outliving your money, you may not live long enough to recoup your premium. Also, once payments start, you typically cannot terminate the contract for a refund of premium.
Now let's talk about deferred variable annuities. Deferred variable annuities can be a good option if you are nearing retirement. This type of annuity allows you to keep your money working until you need it, with the option to convert it to guaranteed income once you retire.
Here's how it works. You invest an amount choosing from a variety of investment options available within the annuity.
Then, once you're retired, you can convert the value of that portfolio into a stream of lifetime income.
Bear in mind that the performance of the underlying investments you select will determine the overall value of the account that you will be drawing from, which may end up more or less than the amount initially paid into the annuity. If you worry about a big market decline jeopardizing those investments, many annuities also offer a useful option known as a guaranteed lifetime withdrawal benefit rider. For an additional fee, this GLWB rider can help protect your retirement income from downturns in the market, while still allowing you to realize growth if the value of the investments in your annuity increases over time. And provided the amount you withdraw each year is not in excess of the amount allowable by the GLWB rider, the payments can last for life, even if you deplete all of the funds in your annuity.
Variable annuities with GLWB riders are complex, so it's a good idea to talk to a Schwab financial consultant and review the details closely before purchasing. Also, different companies offer different features for both types of annuities. So, do your research to fully understand both the benefits and the risks involved.
Whether you are nearing retirement or already there, annuities can help ensure your savings are built to last. Should annuities be a part of your retirement plan?
Talk to us at a Schwab branch near you or visit Schwab dot com forward slash annuities.