Variable annuities to recover retirement income
Many investors, especially those approaching or already in retirement, are seeking ways to add the potential for stability to their portfolios and to help protect their retirement incomes. One approach that has proven attractive is the variable annuity. A well-structured annuity is designed toward recovering and protecting retirement income by helping to reduce retirement income risk.When it comes to retirement planning, there are three main risks to a sustainable income:• Investment risk — all investors have experienced the ups and downs of market cycles, but these fluctuations can be particularly problematic in the years just before and just after retirement. The ability to generate a lifetime income from retirement can depend greatly on when you start to take income and, specifically, on the sequence of your returns. Negative returns early in retirement have more impact, and when returns eventually turn positive, it takes longer to make up the losses caused by the initial declines.• Longevity risk — thanks to advances in science and medicine, life expectancies — and the length of the average retirement — have increased by 20 years. And if both you and your spouse reach age 65, there is a 52 percent chance that one of you will live to be 90. As a result, without careful planning, the risk increases significantly that you may outlive your retirement savings. Income must be able to sustain lifestyle needs for much longer, while also covering health care, housing and other costs for an extended period of time.• Inflation risk — Inflation erodes the purchasing power of your income and wealth. And it doesn’t stop just because you have retired. Of particular concern in any retirement income plan is the cost of health care, which is rising far more rapidly than the cost of living.
Seeking a solution
In the past, it was possible to address these risks individually by combining multiple types of investment products, but it was almost impossible to effectively reduce all risks with a single investment vehicle. Today, however, new annuity designs integrate a range of features and benefits that make it possible to deal with all three risks.A variable annuity is a contract between an individual and an insurance company that provides lifetime payments, beginning either immediately or at some future date. A long-term investment vehicle, it is designed to help protect investors from retirement risk.Variable annuities offer a combination of benefits that includes guaranteed lifetime income, tax deferral, plus death benefits to help protect your legacy.A variable annuity allows you to participate in the market’s potential growth, while offering a guaranteed lifetime income. Of course, all guarantees are subject to the claims-paying ability of the underlying insurance company. You can select various riders, available for an additional fee, that guarantee a minimum level of income for life, regardless of market performance. Other riders can protect you and your beneficiaries by:• Locking in your past investment performance while you still participate in the market• Guaranteeing that your benefit will grow at a specified rate each year, helping you combat inflation no matter how the market performs• Helping to offset taxes at death by increasing your benefit by a percentage of the earnings in the contractVariable annuities are also versatile enough to fit into most retirement programs. Furthermore, money in a variable annuity grows tax-deferred and can be invested in a wide range of sub-account options within the annuity. This allows you and your financial adviser to make strategic decisions that are consistent with your asset allocation and long-term goals.Don Sommese, a certified financial planner who works in the Manchester office of Morgan Stanley Smith Barney, can be reached at 603-629-0200.