Why do annuity payments belong in a plan for retirement income?

There is a very simple answer: Retirees who have annuity payments feel more confident about their long-term finances in retirement.

It seems obvious to someone like me, who is an actuary by training and spent most of my later career in the retirement business. That confidence comes because an annuity payment is similar to Social Security or a pension in one important respect: They all provide a lifetime of guaranteed income.

Since annuity payments are guaranteed under contracts issued typically by highly rated insurance companies, in my view retirees or near-retirees with a reasonable life expectancy should at least consider them as an important source of retirement income. However, according to one survey, a relatively low percentage of retirees — fewer than 15% — make annuity payments part of their retirement income plans.

So, let’s discuss the objections and questions that consumers often have about annuity payments, the contracts that guarantee those payments, and the reasons annuity payments belong in a plan.

Where the confusion comes in with annuities

Today, the annuity landscape is quite competitive and often confusing to average investors. There are many types of annuities. They can be grouped in various ways:

• Accumulation or income.
• Fixed, variable or indexed.
• With or without downside protection.
• Current or future annuitized income.

I take some responsibility for changing the annuity landscape, having invented the first annuity that could be categorized as accumulation/variable/downside protection/future annuitized income.

Unfortunately, contracts providing guaranteed annuity payments often get lumped together with other annuities, and that’s where the confusion creeps in. It’s just like with insurance: Car insurance is not the same as life insurance, health insurance or dental insurance. So, you should look at each annuity based on its stated purpose and not whether it shares a name with another product. One type of annuity might be just right for you, while others might not be a good fit.

The rest of this article is about annuity contracts whose sole purpose is to provide lifetime annuity payments — starting now or at a date in the future you select. Let’s start with a few questions I’ve gotten from readers like you.

Q: Do annuity payments increase with inflation?

A: In some contracts, annuity payments increase over time, but most do not. Those contracts that do provide payments that grow with inflation tend to have a starting annuity payment that is 20% to 30% lower than a contract with fixed, level payments. Inflation protection is not cheap.

Of course, the question about purchasing power and inflation is timely with what’s going on in the U.S. and elsewhere. The Labor Department announced in early February that inflation hit a 40-year high, with consumer prices jumping 7.5% compared with last year. If you relied on annuity payments for all your income, the value lost to inflation would be a major problem. But your retirement income plan shouldn’t look like that.

Read the full article: https://www.kiplinger.com/retirement/annuities/604254/annuity-payments-dont-make-your-retirement-they-make-it-better