Turning the Ordinary Into the Extraordinary

Many investors begin planning for retirement with similar goals that include: maintaining their standard of living, preserving their wealth, and leaving a legacy for their heirs. However, due to increased longevity, when departing from the workforce the number one concern for all retirees should be having enough money to live comfortably in their golden years.

Unfortunately, with the decline of traditional pension plans in today’s retirement landscape, market and longevity risk has been transferred to the individual investor, leaving them susceptible to outliving their assets. As investors begin to age, lower risk fixed income investments may be more appropriate, however due to the low interest rate environment, the prospect of capital gains in these investments has significantly decreased. Annuities can play a pivotal role in effectively mitigating that risk while maximizing the opportunity for legacy planning.

In March of 2018 famed economist Roger Ibbotson unveiled new research analyzing the potential of a Fixed Index Annuity (FIA) as an alternative to bonds in retirement portfolios. Using S&P 500 participation rates to simulate their performance over the last 90 years, Ibbotson discovered that fixed index annuities would have outperformed bonds on an annualized basis. Individuals preparing for, or currently in retirement, may use these products as a vehicle to increase their overall wealth due to a competitive marketplace and recent innovations in the design of FIA’s.

A Fixed Index Annuity is a growth and accumulation vehicle issued and guaranteed by an insurance company. The funds contributed to the contract grow tax deferred, and rather than being invested directly in the market, track a specific index with the potential for interest credited based on positive movement. One of the more attractive features offered by a Fixed Index Annuity is the downside protection guarantee. In exchange for limited upside potential, the insurance company bears the risk of the price index falling below 0%. In addition, there is no fee to the client because the costs are built into the product.

Due to the evolution of this industry, annuity products have become more attractive to potential buyers, further solidifying the need for these products in lifetime planning portfolios. Fixed Index Annuities have evolved to become an accumulation tool, as well as a potential source of income in retirement. Although it is prudent to de-risk portfolios, it is equally important to receive sufficient returns to maintain income requirements in retirement. Considering the low interest rate environment, bond returns likely won’t be enough to satisfy that need. Which begs the question; are bonds our best option or are Fixed Index Annuities an alternative to consider?

Contact an Oppenheimer Financial Advisor to discuss how an annuity can be a strategy for you.