The recent volatility of the stock market, combined with the financial uncertainty facing many people in or near retirement age, could mean a bumpy ride for them down the road.
According to a study by the Employee Benefit Research Institute, only 21 percent of Americans say they’re “very confident” they’ll have enough money to live comfortably through retirement. Issues driving that lack of confidence include long-term care expenses, the unpredictability of stocks, the reduction in pension programs, and reports that many people are behind in retirement savings.
Add the fact that retirees are living longer, and having the dependability of long-term income streams becomes an even bigger factor. In that context, annuities are gaining interest as an option. In a recent study by Greenwald & Associates and CANNEX, 70 percent surveyed said they considered an annuity an important supplement to Social Security.
“While annuities are frequently misunderstood and not appropriate for everyone, they can have substantial benefits when used in the right situation,” says Ryan Eaglin, founder and chief advisor of America’s Annuity (www.americasannuity.com). “That stream of guaranteed income gives you some financial consistency and predictability, which alleviate stress and concern. With plenty of concern about where stocks are headed, that can be a comfort for a lot of people.”
Eaglin lists five ways that an annuity can work as a hedge against against market volatility:
Gives income guarantees. Because Social Security and a pension are typically not enough to cover basic expenses in retirement, many retirees must use their portfolio as an income source in retirement. “If all your money is invested in the market and your portfolio starts to go down, you may get nervous about whether your income source is going to last the rest of your life,” Eaglin says. “An annuity can fix this problem by providing income guarantees. A portion of your portfolio can be used to buy these guarantees.”
Prevents A Panic Sell. Having an annuity as a portion of your portfolio also helps you to not sell in a panic. “Since a fixed annuity gives more stability to an overall portfolio, your portfolio will typically be less volatile,” Eaglin says. “When the markets correct, your portfolio should not decline as much. If the annuity is providing you a guaranteed income, then you can ride out the dips knowing that your income from the annuity is enough to cover your retirement spending needs.”
Makes you think more long-term. Declining times for a portfolio don’t necessarily mean it’s time to bail out. “With an annuity, it’s easier to commit long-term to a stable portfolio as opposed to a highly volatile one,” Eaglin says.
Avoids Market Losses. Equities, bonds, commodities – anything you invest in can go down in price. But a fixed annuity does not. “Even a fixed-index annuity will not decline if the market goes down,” Eaglin says. “The portion of your portfolio that is allocated to a fixed annuity can completely avoid market losses.”
Brings more predictability. “Investment markets are not predictable, and we live in a world of uncertainty,” Eaglin says. “But with an annuity that can guarantee you a specific interest rate, you can know exactly what it will grow to over time.”
“Annuities have some benefits that can help retirees,” Eaglin says. “Stocks can be a great source of income, or a source of great stress, so more people are looking for streams they can count on.”