(BPT) - How big is your retirement nest egg? Is there a chance you could outlive it? Even if you're socking money into your 401(k) every paycheck like clockwork, that's a question worth pondering. Americans are living longer, more active, younger lives. They say that 60 is the new 40, and if you look around at who we used to call "senior citizens," you'll see people in their prime. That's the good news.
It also presents a problem. We're all facing a silent, growing crisis. Study after study, including financial research organization LIMRA's 2016 Secure Retirement Study, shows that many Americans underestimate their retirement expenses. Today, retirement isn't the end of your life, it's a transition point. It's about enjoying the fruits of your labors without the stress of your 9-to-5. Will you have enough money to do that for the rest of your life?
Kent Sluyter, president of Prudential Annuities, says the first step toward achieving that goal is to change your mindset. We're all programmed to think about retirement savings, contributing to that 401(k) and accumulating wealth month after month and year after year. That's important, no doubt, but it's only one part of the retirement puzzle. It's also about generating regular income during retirement, so you're not simply depleting your accumulated retirement savings with nothing coming in to replenish the pot.
One way to get a regular "paycheck" during retirement, Sluyter says, is with annuities. But they're not top of mind for many people, and misinformation and confusion is floating around out there, even in financial advisors' offices.
"The annuities market is at an inflection point," says Sluyter. "Annuities are passed over by many consumers and investors because they are often perceived as expensive and unnecessary."
Annuity sales fell 8 percent in 2017, according to LIMRA data. Observers attribute much of the drop to the Department of Labor's Fiduciary Rule that governs the way financial professionals sell and market annuities. The rule made it less attractive for many to sell annuities and created a great deal of media coverage that amplified existing negative perceptions of them. Annuities have a reputation of being complex, which only increases the risk of their being misunderstood. However, annuities can serve a critical purpose within a retirement portfolio among a combination of strategies, investments and products.
That's why several companies, including Prudential, recently established the Alliance for Lifetime Income with the goal of promoting greater understanding of how annuities can protect retirement income and help grow retirement savings.
'Through the Alliance, we're fostering clarity and simplicity, so consumers have confidence in lifetime income solutions such as annuities," says Sluyter.
What are annuities, exactly, and how do they differ from other retirement savings? Here's a short course in Annuity 101.
An annuity is an insurance product that guarantees income. Just like an insurance policy, you pay into it, often in a lump sum, and it guarantees you monthly, quarterly or yearly payouts for the rest of your life. There are three different types:
Fixed annuity. These allow you to lock in a rate of earning that, even over lengthy periods of time, remain unaffected by market ups and downs.
Indexed annuity. This is tied to a stock index, giving the annuity the potential to grow if the index goes up. If it goes down, you still get any minimum rate of return you agreed to when you bought it.
Variable annuity. If you've got high risk tolerance, this may be the best choice for you. Your lump sum is invested, there's no minimum interest rate guarantee and you may lose money.
Why are more consumers investing in annuities? Sluyter explains:
- Recent equity market volatility is making consumers nervous. Combine that with better clarity from the U.S. Department of Labor about the Fiduciary Rule, and annuities are once again becoming more attractive. Current industry expectations are for a slight uptick in sales this year.
- The 2017 Language of Retirement study found most Americans favor financial strategies that offer guaranteed lifetime income. Ninety percent of all consumers who responded to the survey are very or somewhat interested in receiving lifetime income, which is what an annuity can provide.
- The industry has evolved beyond traditional variable annuities, offering new, more flexible options such as fixed indexed annuities, which can provide protection and are tied to one or more indexes, rather than direct equity performance.
The bottom line is that protected retirement income can help provide much-needed peace of mind for many Americans.
Annuities are issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (in New York, by Pruco Life Insurance Company of New Jersey), located in Newark, NJ (main office), or by Prudential Annuities Life Assurance Corporation located in Shelton, CT. (main office). Variable annuities are distributed by Prudential Annuities Distributors, Inc., Shelton, CT. All are Prudential Financial companies and each is solely responsible for its own financial condition and contractual obligations.