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Strategies for Combating Low Annuity Yields

According to a U.S. Government Accountability Office report*, between 1997 and 2005, roughly 43% of Social Security-eligible individuals began taking benefits within one month of turning 62, even though waiting until their full retirement age (65) would have translated into a substantially higher payout. Between 2000 and 2006, only 6% of retirees with defined-contribution plans such as 401(k) and 403(b) plans chose to move their assets into an annuity upon retirement.* One key reason why so few retirees opt for annuities is loss of control. In contrast with traditional investments that you can alter and tap whenever you see fit, a key premise behind annuities is that you fork over a lump sum in exchange for a stream of payments throughout your life. Another reason is that payouts from single-premium immediate annuities are currently low relative to historic norms (depressed by increasing longevity and the current low interest-rate environment). But this doesn't mean annuities should be avoided altogether. Consider these strategies when purchasing an immediate annuity.

Consider Your Needs: Retirees who have a substantial share of their lifetime living expenses accounted for via pension income or Social Security may want to diversify into investments with a higher level of control and the opportunity to earn a higher rate of return, such as stocks. Those who don't have a substantial source of guaranteed retirement income may find greater utility from annuity products.Annuity

Build Your Own Ladder: One of the key attractions of sinking a lump sum into an annuity is the ability to receive a no-maintenance, pension-like stream of income, which may be appealing for retirees who don't have the time or inclination to manage their portfolios on an ongoing basis. However, a slightly higher-maintenance strategy of laddering multiple annuities can help mitigate the risk of sinking a sizable share of your portfolio into an annuity. Such a program would give you the opportunity to diversify your investments across different insurance companies, thereby offsetting the risk that an insurance company would have difficulty meeting its obligations. However, such a strategy would entail multiple annuity charges, associated with each annuity in the ladder, which could be substantial and adversely impact your total annuity payout.

Consider More Flexible Options: Fixed-rate immediate annuities are typically the cheapest and most transparent, but they're also the most beholden to whatever interest-rate environment prevails at the time the purchaser signs the contract. Some annuities, however, address the current yield-starved climate by allowing for an interest-rate adjustment if and when interest rates head back up. Such products offer an appealing safeguard to those concerned about buying an annuity with interest rates as low as they are now, but the trade-off is that the initial payout on such an annuity would tend to be lower than the payout on an annuity without such a feature.

The examples presented herein are for informational purposes only, are not representative of any specific annuity and do not constitute investment advice. Annuities are suitable for long-term investing, particularly retirement savings. Annuity risks include market risk, liquidity risk, annuitization risk, tax risk, estate risk, interest-rate risk, inflation risk, death and survivorship risk, and company failure risk. Withdrawal of earnings will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal tax penalty. Additional fees and investment restrictions may apply for living-benefit options. Violating the terms and conditions of the annuity contract may void guarantees. Consult a financial advisor and tax advisor before purchasing an annuity.

*Report cited: U.S. Government Accountability Office, Report to the Chairman, Special Committee on Aging, U.S. Senate: “Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices,” June 2011.

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