Age is only one of the important factors that should be considered when determining the appropriateness of an annuity. Of equal importance are the number of years an individual expects to live in retirement, the nature of his or her retirement lifestyle, other sources of income that the individual may have, and life expectancy.
"Today's annuity products offer greater liquidity, flexibility and a broader range of features than in the past, and are uniquely designed to address longer life expectancies, increasing retirement horizons and other new retirement realities," said Mark Mackey, president and CEO of the National Association for Variable Annuities (NAVA). "Annuities can be used in a variety of situations for older Americans, including individuals who require a paycheck for life, and those who wish to take advantage of the traditionally higher returns of the equity market while having protection of their investment against downside market risk."
Like any investment, an annuity is not appropriate for everyone. According to NAVA, the first step is to consider the following important questions, and then consult with a financial advisor:
1. What are my retirement goals and objectives? It is important that you understand your stage of retirement and define your personal retirement goals (e.g., travel, live comfortably at home, leave money to heirs, start a second career). Your needs will be very different if you are entering retirement at age 65, as opposed to living in retirement at age 80. 2. When do I expect to retire? Estimating when you expect to retire is a critical step in structuring a financial retirement plan. Many Americans today are retiring earlier than previous generations. For example, a recent study revealed that 34 percent of Americans expect to retire between age 50 and 64(2). 3. How long do I expect to live in retirement? Today Americans are living longer, and it is more common for them to spend 25 or more years in retirement. Projecting your life expectancy will help ensure your savings will sustain your envisioned retirement lifestyle. Estimate your own life expectancy considering such factors as your current health, the life spans of immediate family members, your current lifestyle, and your outlook on life. 4. Do I need supplemental retirement income? An annuity can be used to supplement your other retirement income sources by providing payments that cannot be outlived to help cover expected living expenses. Calculating the "gap" between available retirement income (Social Security, a pension and savings) and your essential living expenses (housing, insurance, etc.) can help determine how an annuity can be of value. 5. Do I want my retirement savings to continue to grow? As Americans spend more time in retirement, many are in a position to keep a portion of their assets invested in equity-based products, where the highest returns have traditionally been, rather than in more conservative investments, such as CDs and bonds. Deferred annuities allow assets to grow tax-deferred, offer protection against downside market risk and offer the option of guaranteed lifetime income payments at some point in the future. 6. How can an annuity help meet my retirement needs? An annuity is the only personal retirement product that provides a guaranteed paycheck that cannot be outlived. In addition, deferred variable annuities allow you to take advantage of tax-deferred investment growth, while providing "living benefits" offering insurance protection against downside market risk and a variety of options to access your money. Annuity death benefits offer additional protection of your assets. (See Annuity Definitions sidebar for detail.) 7. Is there a surrender period associated with the annuity? There may be charges to withdraw some or all of the funds in the annuity during the early years of the contract, generally five to seven years. While most annuity contracts have surrender periods, many newer products have short or no surrender periods. (See Understanding the Cost of Variable Annuities sidebar for detail.) 8. When will I need access to the money in my annuity? One feature offered by many deferred annuities is the ability to withdraw a portion (e.g., 10-15 percent) of the initial investment each year without surrender charges. Many annuities also provide you with full access to your money -- also free of surrender charges -- in situations of serious illness. 9. What do I need to know about annuity fees and the companies offering annuities? All financial products have fees, including all "no-load" investments. While fee structures vary, it is essential that you understand what you will be charged and when. In addition, annuity buyers need to consider the insurance company's financial strength, ratings and reputation. It is important to know that the company backing the annuity guarantees will be there in the long-run. (See Understanding the Cost of Variable Annuities sidebar for detail.) 10. Does my financial advisor understand my retirement goals? It is important to seek advice from an advisor who is knowledgeable about retirement-related issues and current annuity features and benefits. Prepare a list of objectives before meeting with your advisor so that together you can develop the best plan to meet your financial retirement goals.
"The insurance industry is committed to helping all consumers make more informed retirement planning decisions," continued Mackey. "Our hope is that these questions will help seniors better understand how annuities work and the tremendous value they provide."
About the National Association for Variable Annuities (NAVA)
NAVA is a non-profit trade association located in suburban Washington, D.C. NAVA provides a variety of services to the industry including educational forums, research and conferences aimed at furthering the development and understanding of fixed and variable annuities, income annuities and variable life insurance. NAVA also maintains and supports an educational website for consumers at www.RetireOnYourTerms.com.
(1)Eligibility for AARP membership begins at age 50
(2)NAVA 2005 Retirement Horizon Study
SENIORS AND ANNUITIES SIDEBAR: Annuity Definitions
An annuity is a flexible financial retirement vehicle combining guaranteed lifetime income payments, other insurance benefits and tax-deferred savings, and can be a beneficial option for many older Americans. The following are common forms of annuities:
A variable annuity allows individuals to invest in a variety of investment funds, including stocks, bonds and money market portfolios, and provides returns based on the performance of these funds.
A fixed annuity offers individuals a guaranteed rate of return for a defined period of time and the option of regular, fixed income payments.
Purchased with a single payment, an immediate annuity (also known as a "payout" or "income" annuity) can be designed to provide an income stream to an individual that cannot be outlived.
Purchased with either a single payment or periodic payments, a deferred annuity allows individuals to accumulate retirement assets tax-deferred, and also offers the option to provide income payments at some time in the future. These annuities have become increasingly feature-driven products by adding income and insurance guarantees to protect the accumulated growth of the investment.
SENIORS AND ANNUITIES SIDEBAR: Understanding the Cost of Variable Annuities
All financial products have fees, including all "no-load" investments. While fee structures vary, it is essential that the prospective investor understand what they will be charged and when.
An annuity transfers the risk of outliving your retirement savings from you to the insurance company. It is a flexible financial retirement vehicle combining guaranteed lifetime income payments, other insurance benefits and tax-deferred savings. Annuity fee structures are based on the value of the investment and the insurance features and benefits provided. Typical variable annuity fees include:
Investment Management Fee -- Similar to fees charged by mutual funds, these fees cover the management of the different funds in a variable annuity's investment portfolio. The average investment management fee for a variable annuity is 0.96% of the amount invested in the underlying funds.
Insurance Charge -- Insurance charges include mortality and expense risk charges (M&E fees), which are typically 1.25% of the average value of the investment, and support the annuity's guaranteed lifetime income payout option, the death benefit and the guarantee that the annual insurance charges will not increase. Other elected insurance benefits (e.g., guaranteed minimum accumulation benefit, guaranteed minimum income benefit, guaranteed minimum withdrawal benefit) will have additional fees. Most contracts also impose administrative fees, which are typically around $30 per year.
Surrender Charge -- Surrender charges are the fees charged for the early withdrawal of funds. They generally range from 5-7% of the amount withdrawn and usually decline to zero over a period of time, typically in five to seven years. However, many annuities offered today have shorter or no surrender periods.
In addition to these fees, brokers often receive a commission for their time, expertise and professional guidance, which is similar to the commission brokers earn for equities, mutual funds and other financial products. Usually the commission is paid to the broker by the company issuing the annuity, and does not reduce the annuity's contract value. The company recoups the commission costs over time through the various contract fees and charges listed above.