Scott Romine, President, Jackson National Life Distributors.
2022 was a “year for the books” in the financial services industry, as market volatility, rising interest rates and inflation impacted all Americans. Serving a company that aims to simplify retirement planning through annuity products and financial know-how, I constantly hear about these challenges and the risks associated with planning for life after work.
Although these market dynamics are very real, annuities can lessen their impacts and enable consumers to befriend these so-called “enemies of retirement.”
Enemy No. 1: Longevity Risk
Americans today are living longer than ever before. According to the U.S. Census Bureau, the population of Americans ages 75 and older is projected to more than double by 2040. While this is great news, longevity presents a financial planning concern that can weigh heavily on consumers’ minds.
One of the most significant challenges presented by longevity is the associated increase in health-related expenses. Fidelity Investments found that a 65-year-old couple retiring in 2022 is projected to spend an average of $315,000 in healthcare and medical expenses in their retirement.
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Let’s consider how retirements are funded today. With the decrease in pensions and uncertainty surrounding the future of Social Security, American savers carry the burden of self-funding their retirements, largely through 401(k) plans. The problem is, the typical household nearing retirement with a 401(k) has only about $135,000 in assets, which is certainly not sustainable for 20-30 years.
To combat the financial risk of longevity, consumers can turn to annuities, which are a source of lifetime income that is sheltered from market and longevity risk, meaning the amount of income stays consistent for a lifetime.
Enemy No. 2: Inflation
The annual inflation rate for the United States was 7.1% in November, compared to an annual rate of 1.4% in 2020. And research conducted by our company indicates nearly two-thirds of retirees said they believe the effects of 2022’s inflation would last into 2023 or beyond.
All Americans have felt the impact of inflation, and research shows they’re making adjustments to cut back on near-term spending from groceries and travel to shortchanging their tips. Retirees, however, also need to consider inflation’s potential long-term impact on interest rates, which could affect investment portfolios.
Consider talking to a trusted financial professional about how you can manage your financial plan to account for the long-term impact of inflation by growing your savings nest egg. This may include finding ways to fully participate in the market to take advantage of any potential gains, such as through a variable annuity that offers investment freedom.
Enemy No. 3: Market Volatility
After three strong years of returns, the stock market gave investors a bad case of whiplash in 2022. In the first eight months of the year, more than 87% of trading days for the S&P 500 experienced intraday swings of 1% or more. This type of volatility hasn’t happened since the global financial crisis in 2008 and makes the safety of principal top of mind for consumers. My colleagues in the field often share anecdotes about how many consumers find loss aversion more valuable than gains, particularly in a volatile market.
To mitigate portfolio risk amid stock market volatility and rising interest rates, consider exploring product options that enable you to preserve your nest egg while protecting your assets from market downturns. 2022 saw record sales of annuities, with consumers on pace to purchase $300 billion worth of protection-oriented products. A newer product, called a registered index-linked annuity, enables consumers to choose different degrees of protection to “befriend” unexpected market events.
Know The Potential Tax Impacts And Risks
It’s important to remember that annuities—which are long-term, tax-deferred vehicles designed for retirement and are insurance contracts—may not be the right fit for everyone’s financial plan. If an annuity is used to fund a 401(k) or IRA, the tax deferral would offer no additional value, and other investment products could offer that for less cost. Additionally, if a legal entity (e.g., a corporation or certain types of trusts) owns the annuity, tax deferral might not be available.
Variable annuities and registered index-linked annuities involve investment risks and could lose value because of that. Upon distribution, an annuity’s earnings are taxed as ordinary income. Many add-on benefits that annuities provide are available for an extra charge, in addition to the ongoing fees and expenses of the annuity and may include conditions and limitations. Investors who are interested in using an annuity as part of their portfolio should work with a trusted financial professional to better understand any potential risks associated with the product.
Keep Your Friends Close …
As we kick off a new year, the impacts of 2022 are not lost on anyone. I remain optimistic, however, in our ability to understand these potential “enemies of retirement” and take steps to mitigate their impact. As the saying goes, “keep your friends close and your enemies closer.” I plan to do just that.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.