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The “Best” Annuity Out There: The One Participants Already Have

A frequent question from participants transitioning from the accumulation phase to the decumulation phase of their retirement plan lifecycle is whether they should consider using some or all of their assets to purchase an annuity to lock in an income stream in retirement. Often, what these participants do not realize is that most already have an annuity benefit in Social Security.

Social Security provides a monthly income in retirement for the remainder of one’s life and is available to almost everyone, except those in the old Civil Service Retirement System or meeting another limited circumstance under the law. While Social Security is designed to be a safety net, it can be substantial for lower-income earners, particularly those who wait until age 70 to receive the benefit. Social Security is currently indexed for cost-of-living increases, which provides a major advantage over traditional annuities in the marketplace. It is also significantly less expensive than most traditional annuities, thus making it the best annuity from which most will ever benefit (save for the few receiving annuity benefits from defined benefit (DB) pension plans).

Since most participants already have an annuity, why purchase another? For participants with significantly large retirement plan account balances, annuitizing at least a portion may provide some protection from market downturns. However, in the traditional marketplace, this insurance often comes at a steep cost, and one that is not always transparent. Furthermore, many annuities contain confusing features that only an actuary could love.

However, the annuity marketplace is evolving. Recent innovations, like embedding an annuity feature in a target date fund (TDF), make a lot of sense. Particularly since TDFs can result in substantial accumulations over time if they do their job properly. The potential protection from catastrophic loss that annuities may provide could be worthwhile for larger account balances, provided the cost is not prohibitive.

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Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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