Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers with Morgan Stanley, 329-7979.
Americans insure their homes, cars and family members. But most of us are not protecting our retirement assets. Why? Because most of us are not familiar with the risk we face when it comes to retirement.
What’s at risk?
Americans can no longer rely on the benefits provided by employer pension plans or Social Security to provide guaranteed income for life. With tremendous increases in longevity, many of us could spend as many years in retirement as we did working toward it. With the possibility of a 30-year retirement, we may have more to live for, but will our income expire before we do? The risk of outliving your retirement savings is referred to as longevity risk. If you’re looking to retire in the near future, now is the time to look for ways to help secure your retirement income. Variable annuities provide a solution to carefully consider.
Mitigating the risk
Variable annuities are long-term retirement investments designed to provide income that cannot be outlived. In addition to the benefits of tax-deferral and lifetime income generation, current products offer optional benefits, known as living benefits. Living benefits work to protect your retirement assets and guarantee predictable levels of retirement income regardless of market conditions. A balanced portfolio should include a diverse range of investments, including fixed-income. However, it is important to be aware that these investments are more sensitive to inflation risk. It’s important to consider investments that have a better chance of at least keeping pace with inflation. Historically, equities have provided greater returns.
Protection for You
Variable annuities that offer living benefit options, which come at an additional fee, allow you to invest in the market through a broad spectrum of investment options, covering a range of asset classes. If you elect an optional living benefit, this may allow you to invest more confidently in equities because of the downside protection provided by the benefit, which is backed by the financial strength of the issuing insurer.
In an up market, you can benefit from exposure to the growth potential of the market while protecting your asset base. You may also have the opportunity to protect the gains in your account by locking them in at the new higher account value. In a down market, your assets are protected by placing a floor beneath them.
Protection for heirs
Generally variable annuities offer a standard death benefit that provides a return of your investment, adjusted for withdrawals, at no additional cost. Additionally, some “enhanced” options allow you to lock-in gains for the proceeds to be passed to your heirs. These types of options are generally available at an additional cost.
Making the right choice
Variable annuities are not for everyone and you should seek professional advice if you’re considering purchasing one. However, they may provide an appropriate solution for some, particularly those wishing to secure rollover assets from a 401(k). While there is no additional tax advantage when rolling over assets from other qualified accounts, under these circumstances, investing in a variable annuity should only be considered because of its other options such as living benefit or death benefit protection.
An investor in a non-IRA account may also want to consider variable annuities to take advantage of tax-deferred compounding growth and the higher contribution limits allowed for non-qualified investments.
Most of us would like to maintain our lifestyle in retirement, but may be concerned about the possibility of outliving our assets. Variable annuities provide options that can help retire the risk but not your income.
All guarantees are backed by the claims-paying ability of the issuing insurance company. Living benefits are optional and available for an additional fee. See the product’s prospectus for details.
Variable annuities are long-term investment vehicles designed for retirement purposes and are sold by prospectus only. There are risks involved when investing in a variable annuity, including possible loss of principal.
Articles are published for general information purposes and are not an offer or a solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.
Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers with Morgan Stanley, 329-7979.