A Potential Income Source for the Risk-Averse

A survey of investors 65 and older found that 17% were unwilling to take on any investment risk.¹ Another 19% said they were willing to take only below-average risk, even though they knew it meant they were giving up the opportunity to pursue higher-than-average investment gains.²

Yet 58% of people in this same group also said their investment goals included generating current income.³ How is it possible to generate a retirement income without taking on too much risk? One way is by investing in fixed-income instruments, usually debt securities. But even these instruments pose some risks that investors may not be comfortable with.

An alternative is to purchase a long-term retirement income vehicle from an insurance company. Although no financial instrument is entirely without risk, the guarantees offered by a fixed annuity can help address the concerns of even the most risk-averse investors.

Fixed for Life

An annuity is a contract with an insurance company that provides a guaranteed income at some point in the future, after the contract has been funded with premium payments. If you are concerned about earning the highest possible investment return, an annuity may not be for you. But if you are interested in a guaranteed income or a guaranteed interest rate, you may want to consider the role an annuity could play in your portfolio.

Annuities are flexible and can be shaped to help meet your individual needs. For example, you could choose an income that lasts for a specified period, for the rest of your life, or for the lives of you and another person. Or you might choose to earn a specific rate of return for a guaranteed period, possibly with the opportunity to lock in a higher rate, depending on market performance.

The amount of income paid by an annuity depends on variables that include the amount paid in premiums, the contract’s rate of return, the age and gender of the contract holder, and the number of years over which income payments will be received.

Annuities have contract limitations, fees, and expenses. Any guarantees are contingent on the claims-paying ability of the issuing insurance company. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. The earnings portion of annuity withdrawals is subject to ordinary income tax.

A source of guaranteed income may help remove some of the uncertainty associated with volatility in the financial markets. It’s possible that annuitizing a portion of your savings may allow you to enjoy your retirement years with less concern that you might outlive your money.

1–3) Investment Company Institute, 2008

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.