Annuities for the Boomers

Joe belongs to the baby boomer generation. And like other boomers, he is set to retire in a couple of years. But this is where the similarity ends. Joe has already carved out a ‘retirement income planning’ a term, which might sound alien to many middle aged Americans. According to the 2003 Retirement Confidence Survey conducted by the Employee Benefits Research Institute, 41% of the respondents were not aware of the term ‘retirement income planning’.

Now, this is a serious situation. Retirement income planning refers to investing in instruments that will provide an assured income after your retirement. Many people feel that investing in instruments such as stocks, mutual funds etc. will provide them with an income for a lifetime. However, stocks and mutual funds cannot and will not provide regular income. Both are highly volatile and are influenced by a lot of exogenous as well as endogenous factors such as interest rates, performance of corporate firms, economic stability etc. These instruments cannot even guarantee the safe return of the amount invested by you.

Hence, most experts recommend that the baby boomer generation should invest in annuities. Annuity is essentially a financial contract signed between an individual and an insurance company. The contract requires a regular payment of premium/premiums from the individual’s side, in lieu of which the insurance company will pay him an assured income.

Reasons as to why baby boomers should invest in annuities:

Safeguards the amount invested: Annuities guaranty the return of the amount invested. Only qualified legal reserve life insurance companies are granted permission to issue annuities. The fact that federal as well as state laws strictly govern these insurance companies provides an added protection to the amount invested in annuities. The federal law requires that insurance companies should maintain a reserve that is equal to the withdrawal amount of each individual annuity policy. Similarly, the state laws require that insurance companies should maintain surplus capital and contribute to state guaranty funds to provide additional security. Most boomers are at an age where they cannot afford losing their capital and hence annuities are a perfect option for such investors.
Flexible options: Annuities provide a lot of flexibility to the investor. For instance, annuities let the investor pay the premium in a lump sum or in installments. Annuity also allows the investor to choose the frequency of payments. He can opt to receive the payment on a monthly, quarterly or on an annual basis. This flexibility works to the advantage of the investor. For instance, flexibility in payment of premiums allows the investor to contribute according to his financial capabilities.
Income for a lifetime: There are few products that guarantee the investor an income for a lifetime; annuity is one of them. Opting for a life annuity allows one to receive an income till he survives. This makes annuities a perfect investment option for baby boomers. Modern health care facilities and advancement in medical science has meant that many from the baby boomer generation will live past their seventies and eighties. Under such circumstances, it is necessary that they make investments in financial products that can guarantee them with an income for a lifetime.
Fixed rate of return: Annuities also allow the investor to earn a fixed income. This is especially useful for investors who are on a verge of retirement and would like to receive a fixed sum of income.
Chance to participate in stock markets: Annuities also allow the investor to participate in a stock market, albeit in a much more safer manner. For instance, equity-indexed annuities invest in equity indices like Standard & Poor's 500 Composite Stock Price Index, Dow Jones Industrial Average, NASDAQ 100, and Russell 2000. The annuity policy is credited with a part of the gains made by the stock index. However, since equity –indexed annuities guarantee a minimum rate of return, the investor is shielded from losses.

Annuities are a perfect investment product for the baby boomer generation as they provide good returns, guarantee income for life as well as safeguard the amount invested.

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