In the economic bust of 2008, we learned that easy credit is no way to stretch dwindling retirement funds. Many senior employees took early retirement trusting that their Market-dependent 401(k) would produce an income stream capable of sustaining their unexpected situation.
When it did not, they turned to credit hoping to make it through to better days. As a result they wound up first in bankruptcy, then homeless, and finally destitute. If they and their employers had utilized annuities instead of Market driven investments to create retirement income streams, then a lot of grief might have been avoided.
Annuities Are Sustainable Even In a Down Market
The rate of return offered by fixed annuity plans is based on the amount of time your money is kept out of your hands by the Annuity Fund. The usual holding period is 5 years or more. This means your money is untouchable during those years. In return for this commitment you will receive a guaranteed rate of return.
This rate is usually fixed at 3% to 5% depending on the type of annuity you purchase and the length of time your money is held.
Unlike stock portfolios and mutual funds, the income you receive from annuities does not fluctuate even when the Stock Market rises and falls. This is because annuity rates are anchored on highly stable investments such as US Treasury Notes and Bonds. Because the payout is spread over longer periods of time, Annuity Fund managers can react to changing economic conditions with thoughtful planning instead of panic. This enables them to give you the best annuity rate available.
(Related – Some Do’s and Don’ts of Annuity Investment)
Stocks Can Produce More Income In a Shorter Time
While it is possible for an investor to grow wealthy over night in the Stock Market, every downturn produces its share of impoverished investors. It may be fun to pick the right stocks and watch your investment grow, but it is no laughing matter when the very safety net you depend upon to see you through rough times rips apart just when you need it most.
Fixed annuity rates are not tied to Market performance. You will get your 3% return even if the Market drops to the floor. And even more important; you will get all the money back intact when the required holding period is up. You will also have made 3% interest on that money.
And if, for some reason, you have to withdraw the money before the time is up, a predefined surrender fee will be imposed. But you will still get the majority of your money back. Can your Market-driven 401(k) make that claim?
Sanity and Safety
Make one bad investment in the Market and you can wipe out your retirement nest egg. Annuities offer investors few guarantees. However, most annuity plans are sane and safe. Most important: the money you put into an annuity will still be there after 5 years. Can your 401(k) portfolio make the same claim?