30% of Financial Planners report that running out of money is the top concern of clients planning for retirement.1
This generation of retirees is confronting a set of challenges unlike previous generations.
Life expectancy
Retirees are living longer and may need to plan for more years in retirement. Back in 1970, the average 65-year-old retiree lived another 15 years.2 Today’s average is about 20 years. And for the healthiest Americans, it could be more than 30 years!3
Increased longevity is one factor behind recent changes that may allow seniors to contribute to some retirement accounts later in life, as well as postponing the age to begin required minimum distributions (RMDs).4
Interest Rates
Retirees are living longer and may need to plan for more years in retirement. Back in 1970, the average 65-year-old retiree lived another 15 years.2 Today’s average is about 20 years. And for the healthiest Americans, it could be more than 30 years!3
Increased longevity is one factor behind recent changes that may allow seniors to contribute to some retirement accounts later in life, as well as postponing the age to begin required minimum distributions (RMDs).4
S&P 500®
Unpredictability in the economy and politics, as well as rapidly changing technology, likely means more uncertainty in the performance of the stock market. The S&P 500® experienced great growth in the years after the 2008 financial crisis, but will that growth continue? As you can see from the chart to the right, the economy historically tends to experience periods of expansion and contraction, and that is reflected in the ups and downs of the stock market.6
Solutions
Many retirees who feel unsure about their retirement are looking for a financial vehicle that can:
- Provide for growth and help keep pace with inflation
- Provide protection from market downturns
- Create a lifetime income stream
Financial services companies created fixed indexed annuities to offer potential solutions to these issues.
Fixed Indexed Annuities
Fixed indexed annuities are insurance products that earn interest, in part, based on the performance of an external market index, like the S&P 500®. Fixed indexed annuities are different than more traditional annuities, which typically earn a set amount of interest each year and have no connection to an external market index. Fixed indexed annuities were designed to provide policyowners with growth potential through the upward movement of a market index, while also offering protection from market downturns. Fixed indexed annuities are not direct investments in any stock, bond or other security. Fixed indexed annuities offer a minimum rate of return and no loss of principal or interest credits if the market index declines. Additionally, any interest that is credited to the annuity has the benefit of tax deferral. This means that you will not be taxed on the annuity interest credits until funds are withdrawn from the annuity.
It is important to remember that fixed indexed annuities are long-term products. If you need access to the funds before the contract matures, there may be a penalty for the withdrawal. This is commonly know as a surrender charge. During the surrender charge period, if you take a withdrawal greater than the free withdrawal amount, there may be a percent surrender penalty. The percent varies based on the product, but they may be around 10% in year one and decline by 1% each subsequent year (9% in year two, 8% in year three, etc.). Many annuities allow a free-withdrawal amount each year that is not subject to a surrender penalty. That amount is typically 10% of the contract value or the interest earned.
Lifetime Income from a Fixed Indexed Annuity
Many financial products are designed for a specific purpose. For example, life insurance is designed to provide a death benefit to loved ones in case of premature death. Checking accounts are designed to pay bills and provide short-term cash. One of the primary purposes of fixed indexed annuities is to provide lifetime income, either today or at some point in the future. One benefit of a fixed indexed annuity is it may require less funds to create a lifetime income stream compared to other retirement options.
1. https://www.aicpa.org/press/pressreleases/2019/going-broke-remains-top-concern-in-retirement.html2. https://www.cdc.gov/nchs/data/hus/2016/015.pdf
3. https://www.ssa.gov/cgi-bin/longevity.cgi
4. https://www.fidelity.com/go/secure-act-faqs