Understanding the Role of Annuities in a Retirement Portfolio
June serves as Annuity Awareness Month, a perfect time to emphasize the role of annuities in retirementportfolios. Annuities are often misunderstood, yet they offer substantial benefits to a retirement income plan.
This article uncovers what an annuity is and how it may protect against certain risks in retirement.
What is an Annuity?
An annuity is a contract between an individual and an insurance company. The individual makes a lump-sumpayment or a series of payments, and, in return, receives regular disbursements beginning immediately or atsome future point.
The core purpose of an annuity is to provide a steady stream of income during retirement and thereby provide acushion against outliving one's assets - a critical concern for many retirees.
Annuities come in three main types: fixed, variable, and indexed.
- Fixed annuities: Guarantee a minimum interest rate and a fixed amount of periodic payments.
- Variable annuities: Invest in securities, and their periodic payments vary with the performance of those investments.
- Indexed annuities: Tie the investment's performance to a market index, with the potential for positive returns.
Annuities and market risk
In volatile financial markets, annuities may offer some protection. Both fixed and indexed annuities provideminimum guaranteed returns, regardless of the market dynamics. In case of adverse market conditions, theannuity owner would still receive the contracted payment, providing some stability and predictability in anuncertain environment.
Variable annuities, while susceptible to market fluctuations, offer various protective features, such as deathbenefits and guaranteed minimum income benefits. These features can provide some level of protection againstmarket risk, regardless of market performance.
Longevity risk protection
Another primary risk annuities protect against is outliving one's savings, commonly known as longevity risk. Annuities help mitigate this risk by providing a lifetime income stream. As people live longer due to advancements in healthcare, the risk of outliving savings becomes increasingly significant.
By including an annuity in their retirement portfolio, retirees can build a lifetime income stream, no matter how long they live. This income provides a safety net, offering peace of mind and financial independence in their golden years.
It is essential to understand the role of annuities in retirement planning. Their ability to provide a steady, predictable income and protect against market and longevity risks may make them a suitable addition to a diversified retirement portfolio.
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Before purchasing an annuity, individuals should carefully consider their circumstances and retirement income needs and consult with a financial professional to determine whether it is suitable.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
This material was prepared by Fresh Finance for the Investment Service Center’s use.
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The world faces the biggest oil-supply shock on record, yet, barring a brief initial spike, oil prices have stayed contained, averaging around $90/bbl so far this month.
This week’s chart shows why. The disruption has removed roughly 20 million barrels per day (mbd) of Middle East crude and product supply, but the market has offset those losses through four channels. First, workaround barrels: Gulf producers have rerouted flows through pipelines, while clandestine flows through the Strait have picked up. Together, these have bridged around a third of the gap. Second, demand destruction, led by the Middle East and Southeast Asia, has saved barrels but weighed on activity. However, in the U.S., demand has barely flinched, underscoring how inelastic oil demand is at home. Third, China has cut imports, largely by pausing its stockpiling, leaving scarce barrels for other buyers. Fourth, inventories are increasingly doing the heavy lifting. Global drawdowns have accelerated from 4 mbd in March to 6.1 in May.
All this has brought calm to the market, with the prompt-delivery premium over futures narrowing to $2 from a record $36 in early April. More recently, prospects of an imminent deal have eased price pressure even further. A deal, however, would only slow the inventory draws rather than end them, as restoring supply to pre-war levels could take months. On the other hand, no deal would mean drawdowns continue at the current pace, and the U.S., which has already released 66 of its 172 million committed SPR barrels, would see reserves hit 1983 levels by mid-September, leaving little firepower to cushion prices. Either way, risks remain, and the clock is ticking, even if the sound of it has faded.
Chart of the Week: Source: EIA, J.P. Morgan Commodities Research, Rystad, S&P Global AltView, S&P Global Energy, J.P. Morgan Asset Management.
Thought of the Week: Source: EIA, FactSet, J.P. Morgan Commodities Research, Rystad, S&P Global AltView, S&P Global Energy, J.P. Morgan Asset Management.
Abbreviations: Cons. Sent.: University of Michigan Consumer Sentiment Index; CPI: Consumer Price Index; EIA: Energy Information Agency; FHFA HPI: - Federal Housing Finance Authority House Price Index; FOMC: Federal Open Market Committee; GDP: gross domestic product; HPI: Home Price Index; HMI: Housing Market Index; ISM Mfg. Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally Adjusted Annual Rate
Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally
Adjusted Annual Rate
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Bond Returns: All returns represent total return. Index: Bloomberg US Aggregate; provided by: Bloomberg Capital. Index: Bloomberg Investment Grade Credit; provided by: Bloomberg Capital. Index: Bloomberg Municipal Bond 10 Yr; provided by: Blomberg Capital. Index: Bloomberg Capital High Yield Index; provided by: Bloomberg Capital.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Commodities: Gold, FactSet; Crude Oil (WTI), FactSet; Gasoline, FactSet; Natural Gas, FactSet; Silver, FactSet; Copper, FactSet; Corn, FactSet. Bloomberg Commodity Index (BBG Idx), Bloomberg Finance L.P.
information from FactSet's Pricing database as provided by MSCI. Russell 1000 Value Index,
Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R,
top to bottomare: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stockmarket, and
is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures
the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth values).
Past performance does not guarantee future results.
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