We live in a world driven by economic growth. Our economy depends on multiple exchanges between consumers with a want or a need for something and sellers who offer it at a satisfactory price. We see this in everyday examples. Consumers make some purchases to address their “feelings” about the world. They’re more likely to buy when they see a connection between a purchase and their daily lives. Deloitte surveyed 1,000 Millennials living in 30 countries in 2017. Their study found that young people of this generation, “especially those in mature European economies, have serious concerns about the directions in which their countries are going. They are particularly concerned about uncertainty arising from conflict, as well as other issues that include crime, corruption, and unemployment.” What’s more, in only 11 of the 30 countries surveyed did a majority of Millennials expect to be “happier” than their parents.
The lesson here is that we can anticipate future growth and shape our financial plans around different scenarios, but we won’t know how things will look until we reach the future. We can buy products such as annuities for security income when we feel we might earn less. As smart consumers who keep aging each year, we need different options. How else will we ensure that our dependents are provided for? How will we survive until we are one hundred years old? In this piece, we consider the importance of having sufficient monthly payments in the golden years and why annuities are a viable option.
You Are Building An Agreement
There are many financial websites out there that break down how an annuity works. We know you’ve heard it before. An annuity is an agreement that you make with another party, which is usually an insurance company. For example, you may make a one-time investment of a lump sum (i.e. $5,000) and then count on the insurance company investing your money in exchange for annual returns. The insurance company will give you monthly payments, but these may be variable or fixed.
We want to offer an example of how a fixed annuity works. Let’s say, for example, that you make a one-time payment of $50,000 to an insurance company for a 20-year annuity. It will produce monthly payments between June 1, 2017, and May 31, 2037. During this period, your insurance company (or the annuity seller) agrees to grow your money by 4.5 percent. Some consumers successfully make this arrangement and then live on the payments each month. While it sounds like a big risk, it could be more predictable than keeping all retirement monies in a mutual fund, which fluctuates according to the stock market.
Why Should You Risk Money on an Annuity Arrangement?
We like to think that a traditional employer-funded pension plan will yield enough in the form of monthly payments to survive on for the rest of our lives. If we receive these benefits in addition to Social Security payments, we know we will have regular monthly income. However, we don’t know how long we’ll live, and these combined payments may not be adequate. Because we’re expected to live longer than previous generations, we could decide to secure another form of monthly payment. The great thing about annuities is that consumers choose the terms that work for their situation. When you purchase a fixed annuity, there may be a maximum age at which you are allowed to invest, but “since that limitation often falls between 85 and 95 years old, that is often not a problem,” according to Forbes.com’s contributor, Mark Eghrari.
Help your clients get answers to all their questions about annuities, especially how they compare to other retirement investment options.