Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
The largest risk of a fixed annuity is the loss of buying power. Safety of principal and guaranteed payments is the strong suit of an annuity. An annuity forms the base to protect the retirement income stream. There are certain predictable expenses such as food, shelter and clothing which can be addressed with an annuity. Inflation can erode the buying power of the annuity over time.
Co-Founder, TermInsuranceBrokers.com, Goldenzweig Financial Group, Las Vegas, Nevada
The main risk people face with fixed annuities is the buying power of the payments you receive because they do not have a cost of living adjustment (COLA) built in. Annuities offering COLAs are available, but generally require a higher premium to account for the increase in payments.
How the annuity is structured is very important. You have a number of options to choose from when creating the annuity that will influence your monthly distributions. If the policy is set up to only make payments while you are living (a single-life annuity), then once you die the payments cease and whatever funds were paid into the annuity are not returned. You can also structure the distributions to continue until the spouse dies (a joint life annuity). Another structure or to force payments to continue for a specified number of years (and go to a tertiary beneficiary - e.g. your kids). The drawback of a period certain annuity is you can run the risk of outliving the annuity (e.g. you're 65 years old and you have a 15 year period certain annuity that makes payments to you until age 80. If you live to 81, you will no longer have those funds to depend on each month.).
It's important to consult with an experienced annuity broker who can discuss your situation with you on a personal level and help you create an annuity that will best serve your needs.
I hope the information is helpful - please feel free to contact me for help and if you have any other questions. Thanks very much.
That is a great question! I'm pleased to hear you ask it, as it is really important to understand the risks of investing before you make that investment. The good thing about a fixed annuity is that you know exactly what your return will be. The risk lies in what if that interest rate you will receive does not keep up with inflation over the life of the annuity? Inflation is best described in the amount of rising costs you pay for everyday things. If your annuity pays 1%, but the price of milk and gas goes up 3%, yes, you will have an increase of 1% in your annuity value, but it will only pay for 98% of what it would buy today. You would in effect be losing 2 cents on every dollar you put into the annuity. It is important to work with a good advisor, who can help you find an annuity that will give you a rate that is sufficient, or that provides built in adjustments. If you need help, please feel free to drop me a line, okay? I'm happy to help. Thanks for asking!
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
What are the risks of a fixed annuity? Well the biggest risk is "inflation" risk. That is the money being saved in an annuity is not earning enough to keep pace with or be ahead of inflation. Annuities purchased from financially strong companies don't suffer some of the other risks involved with investing. Actually annuities tend to be very safe choices and as such are not strong return choices, but that is always the side effect of safe investing. For many the idea of putting their retirement money at risk of loss is too much and so annuities become good choices for them.
.JPG){kind=avatar}
How the annuity is structured is very important. You have a number of options to choose from when creating the annuity that will influence your monthly distributions. If the policy is set up to only make payments while you are living (a single-life annuity), then once you die the payments cease and whatever funds were paid into the annuity are not returned. You can also structure the distributions to continue until the spouse dies (a joint life annuity). Another structure or to force payments to continue for a specified number of years (and go to a tertiary beneficiary - e.g. your kids). The drawback of a period certain annuity is you can run the risk of outliving the annuity (e.g. you're 65 years old and you have a 15 year period certain annuity that makes payments to you until age 80. If you live to 81, you will no longer have those funds to depend on each month.).
It's important to consult with an experienced annuity broker who can discuss your situation with you on a personal level and help you create an annuity that will best serve your needs.
I hope the information is helpful - please feel free to contact me for help and if you have any other questions. Thanks very much.