With the recent dive in the stock market, some Americans are wondering how to protect their retirement savings that are exposed to market volatility. Here are three annuity-based strategies that can help.
Short Term Annuities
A short term fixed annuity or fixed index annuity contract between 2 to 5 years in length might be a good option. A consumer can protect the funds for a short period of time, make an average return, then move the funds back when market conditions improve.
Right now, a 3-year annuity is guaranteeing up to 3.10% and a 5-year fixed annuity, up to 4.02% annually.
With most contracts, owners can leave funds in the annuity after the contract is completed, and be liquid. When the market improves, move a portion or all of the funds back into the market.
Example: Purchase a $100,000 3-year annuity. The $100,000 grows to $120,000 over the 3 years. In year 4, all $120,000 is liquid. Move the funds back into the market or just wait until the conditions improve. Either way, the funds are protected from market volatility, there’s an opportunity to make an average rate of return that is tax deferred, and funds are 100% liquid.
Return of Premium Annuities
With Return of Premium, an owner can get the original investment back at any time without penalty. The person won’t pocket any returns, but the money is protected and liquid.
Annuities with Accumulating Penalty-Free Withdrawals
Annuities with accumulating penalty-free withdrawals allow for increased liquidity. Each year the owner doesn’t exercise the annual penalty-free withdrawal provision, the withdrawal limits rollover to the next year providing more liquidity the following year. Think rolling over cell phone minutes.
Example: The annuity allows for up to 10% of the account value to be withdrawn annually without any penalties. The owner doesn’t withdraw any money this year. This year’s 10% will roll over to next year providing a 20% penalty-free withdrawal, and so on. Once a withdrawal is made, the withdrawal amount typically starts over again at 10%.
In times of market volatility, one can purchase an annuity with this feature, and allow the penalty-free withdrawals to accumulate over time. When the market conditions improve, the annuity owner can move large chunks of the account plus any earnings back into the market.
About the author: Shawn Plummer runs The Annuity Expert, an unbiased website that guides consumers and advisors through various annuity and insurance solutions.