- 3-Minute Video
- Jan 29, 2018
How Annuities Can Add Stability to a Retirement Portfolio – Part 2
Annuities that offer protection plus potential for growth.
In part 1 of our introduction to annuities, we talked about how income annuities and fixed annuities can add some stability to a financial portfolio by providing guaranteed income for life.1
In this video, we’ll focus on two other types of annuities: index-linked annuities and variable annuities.
Like income and fixed annuities, index-linked annuities and variable annuities can provide a steady stream of guaranteed lifetime income. But these two annuities can offer more potential for growth. In addition, some index-linked annuities provide opportunities to protect a portion of the annuity’s account value, while variable annuities with a guaranteed withdrawal benefit feature can protect the amount of a person’s future income. Let’s take a look at how each type of annuity does these things.
Index-linked annuities provide the opportunity to participate in the market’s growth potential by tracking a market index that the annuity owner chooses.
If that index performs well, the account earns interest up to a cap – or maximum – set by the insurance company.
If the index performs poorly, the account value is cushioned from a portion of losses based on the level of protection that was selected.
The annuity owner chooses the level of protection based on goals and risk tolerance.
If someone chooses a 10% level of protection, the company that issued the annuity will absorb the first 10% of any index loss during the term selected, and the account value would only be reduced by any negative performance beyond that first 10%.
If someone chooses to allow for some losses, they generally can have the potential for higher gains.
Like index-linked annuities, variable annuities are designed for building long-term retirement savings. They can have greater growth potential than other types of annuities, but also have a greater risk of market loss.
That’s because money is allocated to investment portfolios available with the variable annuity, and the annuity’s account value will fluctuate based on the performance of those investment portfolios. These fluctuations could impact future income provided by the annuity.
Adding what’s called a guaranteed lifetime withdrawal benefit feature to a variable annuity can introduce some protection for future income.
For an additional annual cost, this feature can be added to help protect and grow the amount of future income2:
- No matter how the market performs, this feature can provide a guaranteed minimum level of income in retirement.
- The guaranteed lifetime withdrawal benefit feature can also lock in higher levels of guaranteed income when the market performs well, on specific contract anniversaries.
Helping to protect income from potential market losses is especially important early in retirement. That’s because, if the account value drops right before someone begins taking withdrawals, it can be difficult to recoup that loss in future years. In fact, the account value may never catch up to where it might have been without that market dip. That’s why securing some savings or locking in a guaranteed minimum level of income can be so essential.
There you have it: Two different annuities that can build toward the future, with options that offer a guaranteed stream of income that lasts a lifetime, regardless of market performance.
To learn more about how an annuity can add stability and protection to a portion of a financial portfolio, talk to your financial professional.
To better understand different types of annuities and related terms, download the Annuities Language Glossary created by Alliance for Lifetime Income, a nonprofit educational organization committed to making the language of annuities simpler.