Are annuities the right tool for your retirement?

by Jim Sloan

With recent fluctuations in the stock market, low interest rates on even a high yield savings account and the prospect of living for a long time, many consumers contemplating retirement investments are starting to take a closer look at annuities.

Part of the impetus for the annuity revival results from a General Accounting Office (GAO) report that suggested annuities be combined with other safe investments--such as a certificate of deposit, a money market account or a retirement savings account--as part of your retirement investments strategy.

How annuities work

Annuities are essentially individual pension plans that pay you a set amount each month. You purchase an annuity from an insurance company, and in return you get a monthly check--either for the rest of your life or for a set period of time. Some annuities provide payments to a single person, but other annuities can be purchased that continue to make monthly payments to a beneficiary, such as your spouse.

For example, a 70-year-old man with a 60-year-old wife would receive about $960 a month from a $200,000 annuity. If he dies, his wife would continue to receive the payments until she dies. If the man chooses to receive the annuity only until he dies, his monthly payment would be around $1,400. The more expensive the annuity, the higher the payment.

Of course the couple loses any claim to that $200,000 investment--that money is gone.

Immediate vs. deferred annuities

There are two types of annuities--an immediate annuity, which is when you purchase the policy with a lump sum and start receiving payments right away, and a deferred annuity, which is when you pay into the account over a period of time and start receiving the payments at a predetermined age. Until you convert the deferred annuity into a revenue stream, you have the option of withdrawing from your account or closing it altogether--minus any surrender fees.

With many retirees worried about outliving their savings accounts, annuities can provide valuable peace of mind. Some annuities will increase with inflation, although those products cost more than simple immediate annuities. Annuities aren't guaranteed by the Federal Deposit Insurance Corporation (FDIC), but most states have a guaranty fund that will cover your account up to a certain amount if your insurance company goes out of business.

According to CBS' moneywatch.com, some deferred annuities come with high fees, complex rules on interest rates and earnings, and stiff early surrender fees that make them difficult to compare. Immediate annuities, on the other hand, are simpler and much easier to shop for because there are fewer variables.

What the GAO found

In addition to living longer, retirees are sometimes faced with drawing down their retirement investments at a time when stock prices are low. This is a double whammy because it leaves you with fewer stocks to replenish your wealth when prices climb again.

When faced with situations like these, fixed-income investments, such as certificates of deposits, bonds and immediate annuities, can save you from depleting your stock market investments.

The GAO noted that financial experts recommend retirees convert a portion of their savings accounts into an income annuity while drawing down their other investments at a rate of about 4 percent a year. That strategy, combined with delaying Social Security benefits until full retirement age, decreases the likelihood that you will run out of money during your retirement.

Recession has taught us to be more realistic about retirement

by Jim Sloan

A lot has been written in recent years about how the recession dashed many people's dreams for retirement, forcing many of us to delay retirement and to dramatically scale back our expectations.

The prevailing sense has been that this is a bad thing.

But now comes a new study that suggests that perhaps the baby boomer generation, which is just now approaching retirement with less in their savings accounts and investments than they expected, is redefining retirement--as a promising undertaking rather than as a period of winding down.

Looking on the sunny side

According to the SunAmerica Retirement Re-Set Study, which has been conducted annually for the last 10 years, Americans--despite the financial body blows delivered by the recession--remain optimistic. Among the findings:

  • Three out of five of those 55 and older are hopeful about the future. We have re-set our idea of an ideal retirement and we're looking forward to it.
  • 81 percent of us have learned from the recession about the importance of retirement savings accounts and investments, and as a result we intend to work longer, save more and reduce our spending.
  • 54 percent of those 55 and older view retirement as a new chapter in their life story, not the epilogue. That's up from 38 percent from 10 years ago.
  • Those on the verge of retirement plan to delay retirement from the age of 64 to 69, partly because their savings rates haven't been high enough but also because they know they will be living longer.
  • Two thirds plan to include some work in their retirement as a way of staying active and involved.

Caring for family members

That is not to say that baby boomers and other pre-retirees aren't foreseeing some challenges as they age.

Although 82 percent said their chief financial goal is no longer wealth but peace of mind, about half of them also expect to be supporting other family members, from aging parents to adult children. Prior to the recession, 62 percent of people older than 55 felt financially secure, but now only 44 percent feel that way.

Concerns remain, of course. While 28 percent of these pre-retirees were worried about their savings rates prior to the recession, now nearly 40 percent are worried.

Time for work and play

The new picture of retirement that is emerging is one in which retirees bounce between periods of work and periods of leisure. The work, they say, will be more for "stimulation and satisfaction" than for financial need.

That said, the study found that 76 percent of those surveyed received a financial wake-up call in the last few years and 84 percent admit they exercise more caution with their investments. Two out of three say they want investments--such as a certificate of deposit or money market accounts--that are guaranteed not to lose value.

Four out of five people surveyed said they want advice on the best retirement savings accounts and vestments at their workplace, and more than 90 percent said financial management should be part of the high school curriculum.

Study finds businesses trying to keep older workers

by Jim Sloan

More older workers are staying on the job past common retirement ages, and an increasing number of businesses are accommodating those workers with flexible schedules, work-at-home options and better retirement-planning education on such issues as investments, savings accounts and retirement savings rates.

This is the finding of a recent study by the Bank of America, which found that 94 percent of employers say they want to keep older workers because of their skills.

The study comes on the heels of another study showing that many American workers, who now rely more on their own retirement savings accounts than previous generations, which enjoyed company pensions, have not accumulated enough investments for retirement and are planning to work beyond the age of 65.

The news that the companies surveyed by Bank of America are planning to provide more retirement planning and education also comes at a good time. Another study found that only a third of older American workers understood simple investments or such things as inflation and compound interest rates.

Unemployment among older workers

The unemployment rate among workers 55 and over was 6.8 percent in May 2011, far lower than the 9.1 percent national average for all workers, but significantly higher than the older-worker unemployment rate of 2.9 percent three years ago.

While unemployment among older workers is increasing, the length of time they are unemployed is longer than for younger workers. According to the Bloomberg news service, workers 55 and older were out of work for an average 41 weeks last year--higher than the 35 weeks for workers between the age 25 and 54.

Are older workers less productive?

Despite the Bank of America findings, there is an ongoing debate about whether older workers are less productive than their younger counterparts, and that by staying in the workforce longer, they are occupying jobs that should go to younger workers.

According to a New York Times article by Marcie Pitt-Catsouphes of the Sloan Center on Aging & Work at Boston College, studies show that older workers are not less productive, but to the contrary, can be more productive. Pitt-Catsouphes advocates employers use performance-measuring metrics--not age--to determine which employees are under-performing.

How companies are helping older workers

According to Bloomberg, older workers have been staying in the workforce longer since the 1990s, and the percentage of workers 55 and older who remain in the workforce has climbed from 29.2 percent in 1993 to 40 percent in 2011.

About half of the 650 large companies surveyed by Bank of America said they are doing things to accommodate older workers with flexible schedules, and about a quarter allow these employees to work from home.

About a third of the companies surveyed are providing retirement education about such things as savings accounts, interest rates, CD rates, bank rates and other matters related to retirement investments.

One company is launching a phased-retirement program that allows workers to ease into retirement by continuing to work part-time while contributing to the company's 401(k) retirement savings account.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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