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Retirement Income: Do You See the Whole Picture?
July 8, 2019
Here's one truth you can count on: There are always two sides to every story. What you hear on one side could well sound 100% accurate – until you have enough information to put all the pieces together in perspective.
Annuities offer a telling case in point. Chances are, what you've heard about them isn't entirely positive. But what if there's more to the story?
In fact, the perceptions people often have about annuities aren't necessarily wrong – they simply don't provide the full picture.
Quick reminder: An annuity is an insurance product that can provide you with steady, regular income throughout your retirement years. It also can help bridge gaps in your living expenses that other sources may not be able to fill.
"Not every annuity works the same way," says Tyler Jensch, an annuity product strategist for Thrivent Financial. There are many different kinds available. You can choose the one (or several) that may best fit your financial situation.
Annuities: Get perspective
It's no secret that annuities can be complicated. When you couple that with the information floating around online and through word-of-mouth, it's no wonder there's often misunderstandings about them.
With that in mind, let's look at three common perceptions people have about annuities – and why they may not encompass the whole picture.
Depending on the kind of annuity, there are varying levels of risk involved. But while you can lose money – potentially even principal in some types – you can also buy some annuities that actually protect your principal.
For example, within the two basic types of annuities (immediate and deferred), there are high-level categories that determine how much market risk your funds assume. These include (from least to most risk):
- Fixed annuities
- Indexed annuities
- Variable annuities
Fixed annuities allow you to preserve principal, thanks to an annual fixed interest rate that's bound by a guaranteed minimum interest rate set at the time of purchase.
Variable annuities, by contrast, can gain or lose money based on the performance of subaccounts you choose to invest in – such as stocks, bonds or other vehicles. Your risk: If the market goes down, you could potentially lose money, including principal.
But as Jensch states, "Usually that means you have the potential for higher returns over the long-term," – and potentially more income, most notably.
Determining the right solution for your situation comes down to your risk tolerance – something a financial professional who has your best interests in mind can help you determine.
Yes, there are these sorts of annuities out there. But they aren't the only types you can buy. Those that provide a return of premium option, for example, allow remaining funds to be distributed to those you choose should you pass away.
"There are ways to set up an annuity so that whatever you don't use goes back to your beneficiary," says Jensch.
If you and your financial professional agree that an annuity is a good fit for your situation, it's important to explore your distribution options so you understand – and are comfortable with – the solution you decide to purchase.
That's true in some cases – but not always.1,2 Some annuities don't allow for quick access to cash if a financial emergency arises before you've elected to begin receiving payouts. But others do.
Depending on the type of annuity you're considering, there are varying levels of liquidity to consider – your financial professional can help you take a closer look at the possibilities.
And keep in mind: Your decision to purchase an annuity doesn't have to be an all or nothing proposition. And most financial professionals probably wouldn't advise you to go that route. The best retirement income planning strategies are diverse – they incorporate a wide range of investment and savings tools.
"I'd never recommend putting all of your retirement assets into an annuity – just like I'd never recommend putting all of your money into life insurance or a single mutual fund," Jensch says.
Determine if an annuity is right for you
Again, it boils down to understanding your options so you make the best decision for your needs and goals. And that's where working with a financial professional who understands your values can help.
Preparing for retirement starts with a conversation about what's important to you – and how you envision the landscape of the years ahead.
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2 Surrenders or partial withdrawals/surrenders may be subject to income taxes and/or surrender charges.