If protection and growth are important for you in retirement, you may want to look at your options for a “secure guaranteed retirement account.” Fueled by retirement annuities, this sort of financial strategy can give you a guaranteed income that lasts for the rest of your life. As the defined-benefit pension has disappeared, we have all been forced to think more about alternatives for guaranteed retirement income.
A secure guaranteed retirement account can be an important part of your overall retirement strategy. It can counterbalance certain kinds of risk in other retirement investments. An annuity’s stream of income can cover periods when you need extra income, such as the period between your retirement and your eligibility for Social Security or Medicare.
The predictable nature of an annuity’s income stream can allow you to take a bit more risk or creativity in your other retirement investments. In other words, a retirement annuity can give you security and flexibility.
What Is a Secured Guaranteed Retirement Account?
At its simplest, a secured guaranteed retirement account is an annuity, that is, simply a contract for a stream of income. In most cases, that income stream is guaranteed, the exception being the income stream from some variable annuities.
For our discussion here, we will focus on three primary types of annuities, each of which has different benefits and limitations from the others. These three annuity types also have a timing feature, insofar as whether you turn on your income right away or at a later time. We will look at the types of annuities and then at the timing.
The fixed annuity in your secured guaranteed retirement account is a contract for a guaranteed stream of income. The payment amount comes from the amount of your premium money and your chosen payment structure.
The guarantee is based solely on the claims-paying ability of the life insurance company that issued the annuity. To receive the full benefits offered in the annuity, you must also keep all of the annuity terms.
A variable annuity lets the owner put all or some of the annuity’s premium payments into mutual-fund-like separate accounts. These accounts can make returns like mutual funds but are also subject to the risks of the markets.
In other words, while you can make money beyond any guaranteed portion of your annuity, your funds are also at risk of loss. Because you can lose money, a variable annuity is generally not seen as a secured guaranteed retirement account.
Fixed Index Annuity
A fixed index annuity offers many of the benefits of both fixed and variable annuities. Because it features a guaranteed minimum return (often zero percent in down periods) and no risk of market loss, a fixed index annuity is a secured guaranteed retirement account.
A fixed index annuity is tied to a particular financial benchmark index, such as the S&P 500 or NASDAQ 100 price indices. Your premium dollars can earn interest on the index’s performance but aren’t at risk in the marketplace. That is because your money is with the insurance company, and it isn’t ever a direct investment in the market.
In other words, if the index goes up, your money earns interest. If your index goes down, your money is protected from index losses. As a trade-off for this protection, you can’t receive interest earnings that are the entire gain of the index, but rather are a portion of that.
Your interest earnings are usually limited by a participation rate (what percentage of the index’s gain you can receive) or are capped (a maximum limit on interest earnings that you can receive).
This limit means, for example, that with a 35 percent participation rate, you would have interest earnings that are equal to 35 percent of the index gain. If this limit were a five percent cap, your interest earnings could be, at most, five percent.
This may seem frustrating if the index is up by a high percentage. But it’s important to remember that if your index goes down by a high percentage or even stays flat, your money isn’t impacted by the index losses. You benefit from principal protection in this manner.
Annuities are generally immediate or deferred. In an immediate annuity, you will begin receiving income within a year or less. A deferred annuity will generally not start payments for years after the purchase.
Many deferred annuities, in fact, are never annuitized but are rolled over into new annuities after the end of their surrender period. Any fixed annuity or fixed index annuity, regardless of its timing, can be part of a secured guaranteed retirement account.
Fine-Tuning Your Secured Guaranteed Retirement Account
Riders are one option to fine-tune the details of the annuities that make up a ‘secured guaranteed retirement account.’ You can get riders that allow you to customize your annuity to your needs.
Keep in mind that the more “bells and whistles” that you add to your annuity contract, however, the more that you are giving up elsewhere. Among the more common annuity riders are:
- Guaranteed income rider (can have many names), which gives you guaranteed annual income without having to convert payments to an irreversible income stream, whether you need it then or not
- Long-term care rider increases monthly payments to cover qualifying catastrophic or long-term care needs
- Disability riders increase your payments for a set period if you end up in a qualifying situation of becoming disabled
- Inflation riders help keep your payments in line with inflation – this rider has become much more desirable recently.
- Return of premium rider returns remaining premiums to your beneficiaries if you die before the full value has been paid out.
These, and other riders, allow you to customize your retirement annuity to meet your needs most closely in conjunction with your other retirement assets.
Pros and Cons of a Secured Guaranteed Retirement Account with an Annuity
Retirement accounts with annuities have good and bad features, and you should consider both before making any purchase decisions.
An annuity offers a guaranteed payment stream which can, with the appropriate riders, last throughout your lifetime and even that of your surviving spouse. Except for a variable annuity, it has relatively low risk, especially if you have been prudent in selecting the issuer of your annuity.
Annuities are relatively illiquid, even with withdrawal riders. Moreover, if the markets change rapidly, an annuity by itself may not keep pace with inflation. Finally, some annuities (but definitely not all) can be relatively expensive compared to other retirement options.
Who Should Consider a Secured Guaranteed Retirement Account with an Annuity?
If you are relatively risk-averse or have gaps in your retirement income flow, an annuity may well be the retirement solution you need. An annuity can also help maximize your retirement income when coordinated with other retirement assets.
If any losses would substantially adversely impact your retirement lifestyle, an annuity can provide a cushion of guaranteed income.
How Do You Set Up a Secured Guaranteed Retirement Account with an Annuity?
Licensed insurance professionals sell annuities. The financial professional must also be licensed to sell securities if they were to offer a variable annuity.
Your financial advisor, regardless of their particular overall licensing, should be someone who understands the range and complexities of annuities and how they can fit into your retirement plans.
Talk to your financial professional about your specific retirement needs and desires to see how an annuity can possibly work for you in retirement.
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