We often get questions about annuities for retirement. While they’re a complex product, the prospect of guaranteed retirement income is attractive to many retirees in our region. The Treasury department recently changed the rules on annuities, allowing individuals to purchase deferred-income annuities (sometimes referred to as longevity insurance) within 401ks and individual retirement accounts.
Annuities offer a number of benefits for retirees:
- Guaranteed income – Most annuities are purchased when the retirees enter their 60s and can provide guaranteed income for years, or even decades, into the future.
- Tex deferral – Provided the deferred annuity meets certain conditions, the value and future income payments (up to a certain point) can be excluded when calculating annual Required Minimum Distributions (RMD) that begin at age 70 ½, which means the value can continue to grow with tax deferral. The taxation of the income does not occur until the person begins receiving it, generally in their mid 80s, adding an additional 15 years of tax-deferred growth in the account.
- Insured income – This future guaranteed income helps reduce longevity risk – the risk of running out of money before running out of time. Deferred-income annuities provide insurance that retirees will have some income in later years no matter what happens to their other investments.
But annuities are not without their complexities and it’s important that clients understand the cost-benefit ratio. First and foremost, any guarantees provided are based on the credit of the insurance company offering the product.Second, all annuities have a cost associated with them so it’s important to help clients understand the upfront and potential income payout costs. Finally, because of their cost, annuities should only be used to ensure the amount of income needed by the individual to avoid over insuring.
Annuities can be a great option for increasing retirement income, especially when coupled with other forms of guaranteed income, like Social Security and pensions. The Wall Street Journal recently covered this topic in their MarketWatch retirement blog.
What are your thoughts on annuities? Do you think these new Treasury rules will have an impact on annuity sales? Tell us in the comments section below.