Low Interest Rates Hurt Savers
Where to Turn?
Year in and year out a top fear of retirees is outliving their retirement nest egg. This has been exacerbated since the 2008 financial crisis when the Federal Reserve lowered the federal funds rate to a range of 0 to 0.25% causing a collapse in interest rates that could be earned on safe and fixed investments like CD’s, money market accounts and fixed annuities. This policy, aimed toward preventing a global economic depression, has had some adverse consequences on folks looking for safe returns.
One potential solution for retirees are indexed annuities that utilize income riders to guarantee certain amounts of future income while at the same time offering safe returns on the money invested. So, how do one of these indexed annuities work? The money can be invested into accounts that earn an interest rate dependent upon what a particular market index does over a specific period of time. The insurance company will generally guarantee that the customer cannot lose any money by offering a 0% floor, thereby not allowing the account value to go below the amount originally invested*.
Gains credited to the customers account will be limited by a participation rate, a cap or a spread. If the gains are limited by a participation rate it means that the customer will only participate in the gains up to a certain percentage. For example, if the participation rate is 80% and the index earns 10%, the customer would receive an 8% credit (10% x 80% = 8%). If the index is based on a cap that simply means that all of the gains above a certain percentage are not eligible to be credited to the customers account. If the cap is 10%, any gains above that amount in a given crediting period wouldn’t go to the customer, so if the total gain was 15% the customer would receive 10% (15% – 5% = 10%). Finally a spread works just like it sounds, for example if the spread is 2.5% that means the customer can participate in all of the gains no matter how high they go, but the first 2.5% will not be credited into their account. If operating on a 2.5% spread and the index gains 12.5%, the account will be credited 10% (12.5% – 2.5% = 10%).
This indexed annuity strategy offers retirees the potential for more returns while limiting the downside risk. Indexed annuity products have become very popular with insurance and financial advisors who want to help their clients invest conservatively while still having growth opportunities.
For an additional fee usually around 1% per year the customer can elect to add an income rider to the annuity policy. This rider will typically offer the customer a 5-8% annual increase in their guaranteed lifetime income base, or the money their income stream would be based upon when they exercise the rider. For example, if the customer put $100,000 into the product using the rider and received a 7% annual increase on their income base annually, after 10 years their income base would be $200,000 guaranteed no matter what the actual accumulation value became. If the customer decided to turn on the income, this income base would be the amount used to determine the lifetime income amount, not the accumulated value (unless it was higher). So if the payout rate was 6%, that means 6% of $200,000 or $12,000 would be paid to the customer guaranteed for life.
If you’re concerned about outliving your retirement assets and want to make the most of what you have saved up contact Stolly Insurance today!
*The account value can go below what were invested due to fees or surrender charges.