Fixed interest rate and lifetime income annuities may be suitable for those who have little to no risk tolerance, especially during retirement. Liquidity is always a critical item for purchasing a financial product with a hold position or lifetime income. But there are policy riders that can mitigate liquidity risk. Contractual guarantees are based on the financial strength of the insurance company issuing the annuity contract so it’s important to review a prospective annuity company’s ratings and balance sheet to determine their benefit paying abilities.
Fixed interest rate annuities are an alternative to bonds, especially during a rising interest rate environment. Fixed annuities held for short-term periods like 3, 4 and 5 years can provide competitive returns and mitigate some of the risk in a rising interest rate environment. This type of short-term multi-annuity strategy is called “laddering,” the continual rotation of the fixed annuities until income becomes necessary or long-term rates return to the market.
Even the most skilled portfolio managers find it difficult to generate 3% returns day in and day out throughout the life of their retired clients without some risk. Most retirement portfolios can’t generate guaranteed income that seniors can depend upon for their domestic obligations. Only a guaranteed lifetime annuity can do that and not only is it predictable income, but it removes longevity risk and reduces the overall portfolio beta risk.
So it’s not so much that seniors love annuities, they simply love the results. Think about it. You can’t hate a product line. All financial products; whether they’re annuities, mutual funds, ETFs or REITS have winners and losers. Most savvy seniors seek mutual funds and ETFs with low cost, low risk and good returns. The same process should apply to annuities in their genre; in this case, fixed rate annuities and lifetime income annuities.
Are all mutual funds or ETFs bad because some are too expensive, generate low to negative returns or expose the owner to undo risk? No! No one would say, “I hate all mutual funds” – what they hate is poor performance! So when you read an ad in the newspaper or watch a so-called financial talk show that categorically states that the promoter hates all annuities, think about it. Are all annuities bad? Many of them are not client centric. Fair enough. But what about the good ones? Are all insurance companies ripping off consumers? Does the government just turn a blind eye and continue to allow insurance companies to scam seniors? Does selling an annuity to a suitable prospect equal elder abuse? Of course not! So the performance of non-qualified annuities and their tax advantages have economic value for suitable, conservative prospects.
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