Latest news with #annuities
Forbes
a day ago
- Business
- Forbes
Why Annuities Are Healthy For Retirees?
Senior woman helping senior man during class or seminar Annuities are good for retirees, but America's workers lost access to annuities over the past forty years. Congress, states, and employers attacked the unions that supported defined benefit plans which paid benefits for life. Today, only about half of the 63 million Americans nearing retirement (or retired), age 50 - 64, have retirement accounts. Of those with retirement accounts, the average balance is about $150,000 – far less than they'll need for time they can expect to be retired. So annuities are starting to look better and better. With market volatility and increasing life expectancy, there's a resurgence of interest in guaranteed lifelong income. Annuities, especially when embedded in retirement systems, offer a solution to a complex and increasingly urgent problem for many. Most Americans near retirement—or recently retired—have endured a lifetime of financial insecurity. The scale of the challenge is staggering: 63 million Americans between ages 50 and 64 are entering retirement after decades of stagnant wages, weakened union coverage, and the disappearance of secure defined benefit pensions. Automation and globalization eroded demand for their skills, and many took on mortgages, consumer debt, and even student loans to support their families. Our team at the New School document the rising insecurity of retirement here. The 401(k) causes problems when it is time to spend it. The stress of managing a lump sum is immense. The math is impossible. Annuities help solve what Nobel laureate William Sharpe called the "nastiest problem in finance": how to make a lump sum last for an uncertain lifespan. Being targeted by criminals is also stressful. Scammers often pretend to be legitimate financial advisors and target older people with retirement nest eggs. A 72-year-old with $500,000 is a more juicy target than one with a $3,333 monthly benefit. It's predictable that the FBI reported an almost doubling of reported fraud on Americans age-60+ between and over form 2021 to 2023. There's a spate of research that backs up what, for most people, is common sense: economic security – through annuities – is good for retirees' emotional and physical health. Managing a steady monthly income is healthier than managing a one half million dollars in your 70s and 80s. There are 2 main reasons annuities are good for your health: 1) Since people with annuities have financial incentives to live a long time they take better care of their health, and 2) Lump- sum management causes more stress and depression compared to receiving guaranteed payments. Emerging research suggests that people who perceive they will receive an annuity may engage in more health-focused behaviors. A 2025 study presented at a Consumer Research conference showed that individuals expecting annuity payments expressed a willingness to invest in relatively expensive health checks and pay for more intensive exercise programs than their current routine. Even more notably, people who anticipated receiving an annuity actually increased the intensity of their exercise, compared to those who expected to receive a lump sum. Researchers hypothesize that knowing they can beat the bank by living longer than the expected prompts they to stay healthy. There are open research questions too: Do annuity recipients choose more life-extending treatments? Are they less likely to opt for suicide or assisted suicide? Research shows that financial hardship is a common factor in such decisions, even when controlling for pain, illness, and age, so having a guaranteed income may save lives. We know it lowers depression. In 2024, Canadian researchers found that more stable income—like that provided by annuities—reduced biological stress markers. People with predictable income had lower allostatic loads, a clinical measure of stress that includes high blood pressure, glucose levels, and cortisol. High allostatic load is a signal of increased risk of early death. Economist Constantine Panis found in 2006 and 2015 that annuities improve retiree satisfaction. Holding income constant, retirees with annuities reported higher well-being than those with defined contribution plans. Why would steady income boost health? Happiness is linked to better immune function, better glucose regulation, and lower levels of stress chemicals in the brain. In an article titled "What Makes Retirees Happy?" economists Keith Bender and Natalia Jivan found forced retirement, compared to voluntary retirements, makes people miserable. (And, sadly, most people retire earlier than they want to). A secondary finding is that retirees receiving regular payments were happier and had fewer symptoms of depression than those managing an equivalent lump sum. This research suggests that annuities not only reduce financial stress but can improve mental and physical health outcomes. If annuities are so good for people, why don't more buy them? There's plenty of blame to go around. Some researchers blame the victim. They argue people underestimate how long they'll live and overestimate the likelihood of dying early. Two economists blame this mistaken math calculation for causing chronic fear they will lose money if they turned their nest egg into annuities. And we can stop blaming retirees' bequest motives—wanting to leave money to children. In most cases, these desires could be met by annuitizing most of their savings and setting aside a small portion for heirs. We can blame governments and employers for destroying annuities. The seemingly unrelated trend – the decline in union membership – caused by 40 years of employer, federal, and state policies that undermined union organizing diminished the defined benefit system, while the same policies favored do-it-yourself retirement plans, like 401(k)s and IRAs. You can blame the structure of the commercial insurance industry which faces a rock and a hard place. The rocks in selling voluntary annuities are adverse selection and moral hazard. Adverse selection is caused by the buyers being biased towards healthier people who are more likely to buy annuities. And, as I showed above, once someone has an annuity, they may start living healthier, which creates moral hazard that insurers must also price in. The hard place is that insurance companies also have to price in profit. Together – profit motive, adverse selection, and moral hazard – tend to make annuities more expensive than annuities from defined benefit plans. Compounding the problem, many products are hard to understand. Some consumers are right to be cautious. Annuities can improve well-being by encouraging healthier behavior, reducing stress, and providing a stable income for life. Retirees with annuities report higher satisfaction, lower depression, and even biological markers of better health. Policymakers, employers, and financial planners should revisit how annuities are presented and offered. And the mother of all annuities – Social Security – needs preserving by increasing revenues into the system. Congress needs to pass the Retirement Savings for Americans Act, which provides easy to understand monthly benefits to low and moderate income workers. The evidence is clear: retirement income security isn't just good economics—it's good medicine.
Yahoo
4 days ago
- Business
- Yahoo
Should you buy an annuity? Here's 4 times when it doesn't make sense to do so
Annuities can be a solid tool for generating guaranteed income in retirement, but they're not for everyone. Despite promises of financial peace of mind, annuities come with some big trade-offs. They're complex, often expensive and restrict access to your funds. Before you tie up your money potentially for decades, it's worth asking yourself if an annuity truly fits your financial situation. In plenty of cases, it might not. Annuities are essentially a bet that you'll live long enough to make the upfront investment worth it. You give an insurance company a lump sum or series of payments, and in return, they promise to pay you income — sometimes for life. The longer you live, the better your investment pays off, because no matter how long you live, those guaranteed payments keep coming. However, if you have concerns about your health or your family history points to a shorter life expectancy, you may be better off keeping your money elsewhere. You could spend $100,000 or more to buy an annuity and only get a few years of payments before passing away — leaving little to nothing for your heirs. Some annuities include a standard death benefit, which pays out the remaining contributions minus fees and withdrawals. (You contribute $100,000, receive $60,000 in payouts and your heirs inherit $40,000 minus fees.) You can also add a death benefit rider to your annuity, but that protection comes at an added cost — one you could avoid by skipping an annuity altogether. Similarly, since annuities restrict access to your initial investment, it can be costly — if not nearly impossible — to access your money if your health rapidly declines and your financial outlook shifts. In short, if your health isn't solid, keep your cash more liquid and flexible somewhere else. Learn more: Here's what you should know about inheriting an annuity. An annuity is often described as a do-it-yourself pension. If you're lucky enough to have a traditional pension from your job when you retire, you may already have guaranteed lifetime income. Let's say you're set to get $3,000 per month from your pension, and your expenses are $4,000 per month. Maybe an annuity could cover the $1,000 gap — but so could a smart systematic withdrawal plan, not to mention the ultimate source of guaranteed income in retirement, Social Security. If your pension covers all your essential expenses, an annuity contract will only complicate your retirement plan. You're likely better off keeping additional funds in an IRA or a high-yield savings account for emergencies and nondiscretionary spending. Annuities are complex and a bit different than other financial products. Learn how annuity fees and commissions work and the common annuity terms that every investor should know. You may also want to consult with a financial advisor if you're considering an annuity. Annuities are for people who already have their basic financial house in order. If you're still working on building up your emergency fund or paying off considerable debt, buying an annuity could make your overall financial situation worse, not better. Why? Because annuities generally require a large upfront investment in order to produce any sort of meaningful income in retirement — think $100,000 and up. Most financial experts recommend putting no more than 25 percent of your savings into an annuity, so you should have plenty of money elsewhere before signing a contract. Because once you buy an annuity, getting your money out can be difficult. Annuity funds are notoriously difficult to access without getting hit with surrender charges and tax penalties. And once you annuitize your contract, meaning you start receiving payouts from the insurer, you may not be able to take an early withdrawal at all. Annuities also generally don't offer great growth potential or adjust payouts to keep pace with inflation (unless you pay extra). If you're still trying to build wealth, you're likely better off keeping your money in a Roth IRA or a brokerage account. Get started: Match with an advisor who can help you achieve your financial goals Annuities are most useful for people who want to outsource some of their retirement planning decisions — particularly when it comes to managing investment risk and timing withdrawals. The insurance company handles the investment, the payouts and manages the risk of outliving your money. But that convenience comes at a cost: high fees, rigid rules and less flexibility. If you feel confident managing your own portfolio, it's not very useful to pay an insurance company to do what you can already handle yourself. You're likely to get better returns and more control by keeping your money invested and drawing it down in a tax-efficient way. If you want a second opinion, a one-time session with a fee-only financial advisor could go a long way and cost only a few hundred dollars — a drop in the bucket compared to the potential hidden fees baked into many annuity contracts. While annuities aren't the right choice for everyone, there are valid reasons why they continue to be part of retirement planning conversations. The trade-offs are real, but so are the benefits — especially if you're focused on long-term financial security. First, not all annuities are expensive or inflexible. Multi-year guaranteed annuities (MYGAs): These are fixed-rate annuities that act more like CDs, but with deferred taxes. They're simple, low-cost and don't require giving up access to your money forever. Longevity annuities: These deferred income annuities are purchased at retirement but don't start paying out until later — usually around age 80 or 85. Because they're designed to cover only the later years of retirement, they require a much smaller upfront investment than annuities with lifetime payouts. Second, you might feel confident managing your investments now — but what about in your 80s or 90s? Cognitive decline is a real possibility, and not everyone has a reliable person to step in and manage their finances. An annuity can automate your income and help protect you from poor decision-making later in life. And finally, while annuities are often seen as rigid, there are ways to build flexibility into your contract. For example, you can add a long-term care rider if you're worried about your declining health. Many contracts also allow annual withdrawals of up to 10 percent before you fully annuitize, giving you access to a portion of your money if you need it. Ultimately, buying an annuity is a deeply personal decision. The best move is to talk through your options with a qualified financial advisor before moving ahead. Annuities are heavily promoted as a solution to retirement planning, especially by sales reps and agents who make commissions selling them. But in reality, they're far from a one-size-fits-all fix and there are plenty of times when buying an annuity simply doesn't make sense. If you're on the fence, ask yourself what problem you're actually trying to solve by purchasing an annuity. If it's peace of mind, reliable income or protection against market volatility, there might be simpler, cheaper ways to get there. Compare advisors: Bankrate's list of the best financial advisors Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Sign in to access your portfolio
Daily Mail
5 days ago
- Business
- Daily Mail
Are you at risk of a 'zombie retirement'? Pension savers warned over this common mistake
People purchasing annuities could be missing out on more than £400 a year by failing to shop around, findings reveal. More than a third of those aged over 50 or over who got an annuity in the last four years said they purchased it from the same provider they saved with, according to financial services firm Just Group. And a similar number surveyed also admitted they did not compare rates between different providers when they purchased an annuity. The gulf between the best and worst-paying annuities has widened and the rates on offer have increased in recent years, making it all the more important to shop around. What's more, people buying an annuity may not always have to plump for the standard advertised rates on offer. In some cases, annuity rates can be tailored to an individual's health and lifestyle and could be higher than the standard offering. However, three quarters of adults aged between 50 to 69 planning to access their defined contribution pension in the next two years said they were not aware that certain health conditions could increase their annuity income. Annuity rates have increased sharply in recent years due to rising gilt yields caused by persistent inflation, potential tariff policies and delays in anticipated interest rate cuts. According to Hargreaves Lansdown's annuity search engine in April, a 65-year-old with a £100,000 pension can get up to £7,882 per year from a single life level annuity with a five-year guarantee. This is 63 per cent higher than the sum available five years ago, it said. 'These increases are welcome news for anyone in the market for a guaranteed income in retirement and have contributed to a real revival in a market that was once considered on the edge of extinction. Last year was a bumper one for the annuity market and current rates will continue to fuel interest', Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said. Stephen Lowe, group communications director at Just Group, said: 'Higher rates on guaranteed income for life products have increased customer interest but there are still too many "zombie buyers" who are not shopping around to get the best annuity deals available. 'Over the course of an entire retirement, a saver failing to shop around could be missing out on thousands of pounds of extra income – the closest thing in the financial world to being given "free money." 'Anyone considering purchasing an annuity should shop around the open market and ensure they disclose information on health and lifestyle factors to make sure they get a personalised rate – all of which will help them secure the best rate on offer to them.' Government-backed Pension Wise provides information on annuity purchases, while annuity brokers or financial advisers can also help people select a provider. There are also various online annuity rate comparison tools and pages available to browse for free. Just Group's data was based on the Financial Conduct Authority's Financial Lives Survey 2024, of nearly 2,000 people, published last month. An annuity is where you use your pension pot to buy an income that lasts for a fixed period of time or for the rest of your life. Annuities were shunned for years due to poor rates and restrictive conditions, and after gaining a bad reputation on the back of annuity mis-selling scandals. Better rates have, however, prompted something of a resurgence. Most people who buy an annuity opt for a version that pays out the same amount year after year. However, some people opt for an annuity that has inflation protection built in. This type of annuity pays out a smaller monthly sum at first, but that increases over time in line with the cost of living. It is also possible to purchase a series of annuities throughout your retirement. Annuities are a large and long-term purchases. They should not be purchased on a whim and without doing adequate research about the pros and cons involved beforehand.
CBS News
26-05-2025
- Business
- CBS News
What types of annuities should seniors consider now? Experts weigh in
We may receive commissions from some links to products on this page. Promotions are subject to availability and retailer terms. Seniors should carefully consider their annuity options to determine which makes the most sense for their financial circumstances. Getty Images Despite cooling inflation, market volatility and increasing lifespans have left many older Americans worried about their retirement security. As seniors face the reality that their savings may not last as long as they'll live, more are turning to annuities for guaranteed income. These insurance contracts convert a lump sum investment into steady income payments — sometimes for life. But choosing among the various types requires understanding how they work and what fits your needs. We asked financial experts about the annuities that make the most sense for seniors in today's economic environment. Below, they highlight the top options, explaining the pros and cons of each and how they fit into a well-rounded retirement strategy. Find out more about the benefits of annuities here. What types of annuities should seniors consider now? There are four annuity types seniors should consider now, experts say: Immediate annuities "A Single Premium Immediate Annuity (SPIA) offers a guaranteed stream of income for your lifetime, a set number of years or both," Mary Stork, senior vice president and general manager at USAA Retirement and Investment Solutions, explains. "You pay once, and the income starts right away — usually within 12 months." Many retirees use these payments to cover essential expenses, including housing and healthcare. Financial experts highlight these key immediate annuity advantages: Longevity insurance: Predictable payments ensure you don't run out of money in your golden years. Predictable payments ensure you don't run out of money in your golden years. Market protection: Annuity payments stay stable regardless of stock market crashes or economic downturns. But these annuities come with limitations: No liquidity: "Once you [buy an immediate annuity], you [can't access] the money any longer," cautions Jonathan Viscounte, CFP, CLU, ChFC, a financial planner at Prudential Advisors. "Once you [buy an immediate annuity], you [can't access] the money any longer," cautions Jonathan Viscounte, CFP, CLU, ChFC, a financial planner at Prudential Advisors. Limited earning potential: Immediate annuities may have lower yields than other retirement income sources, such as bonds or stocks. Explore your immediate annuity options online to learn more. Fixed indexed annuities "A Fixed Indexed Annuity (FIA) is a deferred annuity that offers more opportunity for protected growth than a traditional fixed annuity," said Stork. "Its growth is tied to an index such as the S&P 500, but without the risk of market losses." These annuities serve a strategic purpose in retirement planning. "[You can use them] to offset portfolio risk while still following equities," Viscounte notes. Christopher L. Stroup, a certified financial planner and founder of Silicon Beach Financial, adds that they're particularly valuable for risk-averse retirees. With a fixed indexed annuity, you enjoy the following benefits: Principal protection: Your initial investment stays safe even when markets decline. Your initial investment stays safe even when markets decline. Growth potential: These products may outperform traditional fixed annuities during strong market years. FIAs come with some drawbacks, though: Capped returns: There's a ceiling on how much annuity income you can earn, even in bull markets, Viscounte points out. There's a ceiling on how much annuity income you can earn, even in bull markets, Viscounte points out. Surrender charges: You'll face penalties for early withdrawals, typically for up to 10 years of the contract. Deferred income annuities "A Deferred Income Annuity (DIA) starts paying income at a future date — usually several years after purchase," Stork explains. It essentially lets you create your pension down the road. These annuities work best as a longevity hedge in your retirement strategy. "They [suit] retirees [seeking] guaranteed base income to [complement] their Social Security checks," says Viscounte. Annuity advisors point to these reasons to consider deferred income annuities: Higher payouts: "The longer you wait, the higher the payout," notes Stroup. "The longer you wait, the higher the payout," notes Stroup. Longevity planning: These products provide excellent protection against outliving your other retirement assets. At the same time, DIA buyers should be aware of these cons: No liquidity: "You give up liquidity and control of [these] assets [during the deferral period]," Stroup cautions. "You give up liquidity and control of [these] assets [during the deferral period]," Stroup cautions. Inflation concerns: DIA payments generally don't adjust for inflation. This can weaken your buying power over time. Variable annuities "Variable annuities invest in mutual fund-like subaccounts, offering market exposure and optional income or death benefit riders," explains Stroup. These products are ideal for specific retirement scenarios. Stork recommends them for people with higher risk tolerance and longer time horizons. They work well as a supplemental growth tool with optional lifetime income, especially if you already have other guaranteed income sources. Industry professionals note a couple of variable annuity pros: Unlimited upside: "They don't cap the upside to growth like fixed indexed annuities do," says Viscounte. "They don't cap the upside to growth like fixed indexed annuities do," says Viscounte. Tax benefits: Earnings grow tax-deferred until you withdraw them. However, be wary about these tradeoffs: Market risk: "The investment part works [like] regular investing," emphasizes Viscounte. "There are no guarantees as far as the results go … you [don't get] downside protection." "The investment part works [like] regular investing," emphasizes Viscounte. "There are no guarantees as far as the results go … you [don't get] downside protection." High fees: "[Annual] fees often exceed 2%," cautions Stroup. Other costs, such as sales charges, management fees and surrender penalties, may eat into your annuity returns. The bottom line Annuities can be vital for retirement planning, but each type serves a different purpose. Before signing any contracts, consult a financial advisor. They can help you understand the use cases and tradeoffs. Pay special attention to liquidity restrictions, as annuities often limit access to your money. The right annuity could provide peace of mind — if it fits within your broader financial plan.
Yahoo
22-05-2025
- Business
- Yahoo
3 Money Traps Lower-Middle-Class Folks Get Tricked Into
Those in the lower middle class may be trying to find a new way to climb to the next rung of the socioeconomic ladder, but there are those out there who would take advantage of it, pulling the rug out from under them with the allure of prosperity and wealth. Read Next: Find Out: If you consider yourself in this tax bracket, watch out for these kinds of plots that can work against you. Here are three money traps lower-middle-class folks can get tricked into. Also see eight money traps millennials fell for that Gen Z avoids. Sean Babin, CEO of Babin Wealth Management, advised steering clear of annuities, which are contracts between an individual and an insurance company. With annuities, an individual will purchase one in full or with payments and then the insurance company will make payments to them for a certain amount of time, per 'Behind the scenes, these insurance companies have rigged the game in their favor through either high fees and/or caps on how much you can make,' Babin explained. 'Annuities can have what's called a 'cap rate,' meaning if your cap rate is 10% and the stock market returns 24%, like it did in 2024, the insurance company gets to keep all that growth over 10%.' If your goal is to grow your wealth, Babin cautioned that an annuity is not the product to do it in. 'If you have an annuity, discuss your options with a fiduciary, not the insurance company,' he said. Explore More: Spend money on a credit card and earn points, cash back, miles and other rewards in return. For some, this might sound like a win-win, but it can be a lose-lose. That's because you need to make sure you are paying off your balance in full if you choose to get one of these credit cards, according to Michael Rodriguez, founder of Equanimity Wealth. 'These cards deliberately target aspirational lower-middle-class consumers with promises of luxury perks and lifestyle upgrades, knowing many won't be able to pay off their balances,' Rodriguez said. 'When you pay such high interest to get pennies on the dollar for travel rewards, you end up losing more than you are gaining. I love using credit cards for the perks, but it is important to avoid the high interest credit card trap.' 'The average credit card interest rate is 22%,' Babin said. 'If you spent that $5,000 to get the welcome bonus but could only pay $2,000 back, the annual interest owed on $3,000 is $660.' Having an expensive car is one of the quickest ways to set you back financially, in Babin's professional opinion. 'If your car payment is over $700 per month, you have an expensive car,' Babin said. 'Don't get trapped into buying a car that's more than you need.' Rodriguez highlighted that traditional auto loans used to be around 60 months and are now closer to 84 months. 'These extended terms specifically target lower-income buyers by making expensive vehicles seem 'affordable' with smaller payments spread over more years,' Rodriguez explained. 'What they don't emphasize is how much more you'll pay in interest, or that many buyers end up with negative equity.' In other words, one could end up owing more than what the car is worth, only adding to the financial woes of the lower-middle-class folks trying to get ahead. More From GOBankingRates 5 Types of Cars Retirees Should Stay Away From Buying Sources Sean Babin, Babin Wealth Management 'Annuities.' Michael Rodriguez, Equanimity Wealth This article originally appeared on 3 Money Traps Lower-Middle-Class Folks Get Tricked Into Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
