- Retirees need reliable income to last them three decades or longer.
- Due to market instability, relying on 401(k) plans isn’t enough.
- Social security, while guaranteed income, might not remain viable in the future.
Bridging the Retirement Gap
Annuities can help address the financial challenges of retirement
As Americans live longer, they have more time to enjoy retirement. However, as longevity increases, so too do the financial obligations of a retirement that could last three decades or more. And now meeting those obligations is more difficult than ever. By exploring annuities, you can help deliver the optimum scenario for your clients.
These days, 80 million Americans actively participate in 401(k) plans.1 And, while these defined contribution plans have shifted the retirement savings picture for many individuals, they also expose individuals to market risks that can leave them short of their retirement income goals. It’s clear that the market has moved toward defined contribution plans with employees taking more responsibility for driving their own financial security.
With retirement tools like annuities, you can help take some of the uncertainty out of your clients’ retirement income pictures. Variable and fixed indexed annuities provide regular income and are an excellent way to help fill the gap left by pensions. Best of all, that guaranteed income means that your clients’ money is there when they need it, so they can ultimately live the retirement lifestyle they want.
Is retirement within reach?
More Americans face retirement savings challenges, including rising costs and the risk of running out of money. With the median retirement account balance for American households estimated at $50,000,2 it’s not surprising that just 18% of workers are very confident in their ability to retire comfortably.2
Adding to workers’ savings challenges is the fact that many don’t have access to workplace retirement plans. While 71% of full-time workers have access to an employer-sponsored plan like a 401(k), only 45% of part-time workers do.2 And many aren’t taking full advantage of the savings opportunity, with only 56% of workers participating in a retirement plan at work.3
Compounding the issue, retirees face rising expenses. Medical costs are the number one largest expense in a worker’s retirement years, with a healthy 65-year-old couple typically facing lifetime healthcare costs of nearly $400,000.4
Developing an income stream to cover these types of expenses can be challenging. And Social Security, while one of the few forms of guaranteed retirement income, isn’t a given, with 77% of workers worrying that it won’t be there for them when they retire.5
Despite these concerns, workers aren’t doing enough to shore up their own retirement income plans. While 64% of workers say they have a retirement strategy, only 26% have a backup plan for retirement income should something happen to them to prevent them from working before they retire.5
The role of retirement income tools
In the face of these challenges, guaranteed income products such as fixed indexed and variable annuities can help take some of the guesswork out of saving for retirement.
Annuities can help workers:
- Supplement Social Security or pension income
- Receive lifetime guaranteed income
- Cover essential or even discretionary expenses
- Accumulate assets for retirement
- Leave a financial legacy
Annuities also offer options that aren’t available through other retirement savings vehicles, including protection against downturns in the financial markets, death benefits that can protect families, and even living benefits that can provide more flexibility and control to better fit an individual’s income needs.
Understanding the different types of annuities
There are several different types of annuities, including fixed indexed and variable annuities. While these types of annuities share a lot of characteristics, they also have some key differences that may influence individuals’ investment decisions.
Here’s a look at each type of annuity, and the potential advantages of adding a living benefits rider, usually for an additional cost:
Fixed indexed annuities
The main feature of fixed indexed annuities (FIAs) is the downside protection they offer. Even if the financial markets decline, FIAs offer a guaranteed minimum return and guaranteed payments. That reduces the risk that market movements will interrupt an individual’s income stream. There is a tradeoff, however: A cap on growth may limit some exposure to market upside.
A FIA is not a security and is not an investment in the stock market or in financial market indexes. FIAs offer growth potential by locking in interest earnings based on positive movement of an index. They also offer tax-deferred growth, and allow individuals to allocate premiums to a variety of index account options. For instance, the fixed indexed annuity may focus its investments in a broad equity market index such as the S&P 500®, however they are not directly invested into the index and will not receive dividends. As the index grows, your policy can periodically lock in that growth. When the index falls, the policy maintains its value until markets rise again. However, there is no guarantee that the index interest rate will be greater than zero percent.
Because flexibility is important, some FIAs offer withdrawal options that don’t trigger a surrender charge. For example, individuals may make withdrawals up to 10% of their total premium payments.
Variable annuities offer a wider range of investment options. An owner of a variable annuity may be able to choose from a selection of professionally managed investments such as money market, bond, and stock options.
Variable annuities are long-term, tax-deferred vehicles designed for retirement purposes and are subject to investment risk, including possible loss of principal. Variable annuities also offer greater opportunity to share in market gains. The level of income derived from a variable annuity is linked to market performance. And while variable annuities allow individuals to take greater advantage of market upside, they also offer downside protection with a living benefit rider. That helps keep market fluctuations from knocking an owner’s income strategies off track. Like FIAs, variable annuities offer tax-deferred growth, surrender charge-free withdrawal options, and optional benefits to provide lifetime income.
Living benefits riders
Once you’ve chosen the annuity that’s right for you, you can add additional benefits for additional fees to further tailor it to your needs, including a living benefits rider. With a living benefits rider, income is guaranteed to grow and can’t be outlived. In fact, as long as the terms of the rider are met, income can’t fall, even if the policy’s value reaches zero, giving full protection against the unexpected.
Tools for retirement stability
Even as retirement has become more uncertain, annuities are tools your clients can use to bolster their retirement income plans. Fixed indexed and variable annuities can provide the income retirees need to cover their necessary expenses, stay invested in the market, and keep their other investments growing while not worrying about market performance or interest rates. Ultimately, annuities can help your clients be confident that their money doesn't run out during retirement, so they can maintain their quality of life and lead the lifestyle they deserve.
All guarantees, including optional benefits, are based on the claims-paying ability of the insurance company issuing the annuity. Withdrawals of taxable amounts are subject to ordinary income tax and may be subject to a 10% additional federal tax if withdrawn before age 59½.
Things to Consider:
- Annuities help provide protection against market downturns.
- With annuities, your clients can receive lifetime guaranteed income.
- Give your clients the tools to confidently cover the unexpected and leave a financial legacy.
1 American Benefits Council, “401(k) Fast Facts,” January 2019
2 Nonprofit Transamerica Center for Retirement Studies, “19th Annual Transamerica Retirement Survey of Workers,” December 2019
3 U.S. Bureau of Labor Statistics, September 2019
4 HealthView Services, “Retirement Health Care Costs,” July 2019
5 Nonprofit Transamerica Center for Retirement Studies, “19th Annual Transamerica Retirement Survey of Workers,” December 2019
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as, medical, insurance, securities, tax, legal or financial advice or guidance. Please consult your personal independent advisors for answers to your specific questions.