STOP LOSING MONEY ON RETIREMENT SAVINGS!
Unless you invested 100 percent of your retirement savings in cash or money market funds, it’s likely that the market value of your retirement plan declined substantially in 2022. The total return for the Standard & Poors 500 index was down 18.1 percent and the tech rich NASDAQ composite was down a whopping 32.5 percent!
Bonds did not fare much better. The Fidelity U.S. Bond index total return was down 13 percent. How has that impacted your retirement goals? If you were planning to retire in the next five-ten years, you may not have time to recoup those losses and offset the impact of inflation.
Not knowing when market corrections will come, what could you have done differently?
For your retirement savings, particularly if you wanted to get most of the stock market upside but eliminate any negative returns, you might consider putting a portion in an insurance product known as an index annuity (IA). An index annuity will grow annually by an interest credit based on the capped growth percentage of a market index that you select. (e.g., the 12-month growth in the S&P 500 limited by a 10 percent cap or 70 percent participation rate).
With most IAs there’s a zero percent floor. So, although your upside gain could be limited, you can’t lose money when the market has a negative return.
Are there disadvantages to owning an index annuity?
Index annuities are insurance products. So, they are dependent on the financial strength of the company. That said, companies don’t recommend that you put all of your retirement savings in an IA. Also, the IA index options and crediting caps may be changed by the insurer. Further, the plans have surrender charges so withdrawals can be costly should you need a large lump sum.
So, how do I get my money out?
That’s actually the other good news! Most IAs offer guaranteed lifetime payment amounts (LPA). So, once you begin taking LPAs, you’ll be paid no matter how long you live! The amount is based on your age and the balance in your account. You select either a single or joint lifetime payment.
Besides the insurance company’s financial strength, how LPAs are calculated can be the most important feature in determining which plan to purchase. IA payouts can be a fixed percentage of the base (e.g., 6 percent of $100,000), or an increasing amount based on the annuity owner’s age and/or the current year’s credited interest.
At least one insurer offers higher payments in early years tailing off to lower payouts in later years. In most cases, payout percentages will be higher than those recommended by investment advisors on a market portfolio.
The bottom line is you can avert the risk that a stock market downturn will spoil your retirement plans. Index annuities can provide certainty that you won’t lose money or outlive your retirement funds. Before relying on the points above as they relate to your circumstances, it is recommended that you review them with your tax and legal professionals.
