The volatility of financial markets has scared some investors into considering old-fashioned, lifetime-income annuities for their retirement incomes. In fact, the Treasury Department has proposed regulations to make it easier for retiring employees to buy an annuity through their company-funded retirement plans. These are guarantees from insurance companies: you give the insurer a lump sum of money, and the insurer pays you a monthly income, guaranteed to last throughout your life.
A somewhat complicated version is popular among insurance agents and stockbrokers: variable annuities linked to stock-market investments that guarantee a minimum monthly payout but that can increase the payout if markets go up. This concept appeals to nervous investors who want stock-market performance but don’t want to risk a decline in their retirement income.
Are variable annuities the answer for retirees? Research indicates that this type of guarantee may not be a panacea. Some experts argue that the relatively high internal costs in variable annuities tend to erode the invested balance. It is less likely that the payout to a retiree will be increased during his lifetime. This would be especially true during periods when the retiree would be most in need of increased income: periods of high inflation and low stock-market performance. Although the initial fixed payout may look attractive, their value will gradually decline over the years as inflation eats at their purchasing power.
Research found that in some cases the guaranteed spending amounts after 30 years may be as little as 20% of the initial level after adjusting for inflation.
Although annuities may play a roll, they are probably not a panacea for retirement income. Be careful when considering these retirement income vehicles.
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