How to Guarantee Cash Flow
Without a Paycheck

If you want income you can count on, consider making an annuity part of your retirement strategy.
As you prepare to shift gears on your work life—and as work-related income decreases accordingly—you will want to secure other ways to generate regular cash flow. With fewer employers offering pension plans and market volatility still a concern, more investors are looking to annuities and the income they provide as a key component of their overall retirement plans.

Investing a portion of your retirement savings in an annuity can supplement other sources of income, such as employer-sponsored retirement plans and Social Security. “It can be a way to create lifetime, guaranteed cash flow that can’t decrease and that an individual or couple can’t outlive,” says Gary Fritz, vice president and annuity national sales manager at Morgan Stanley.

Basics to Consider

Annuities are insurance products designed to provide a regular stream of income to investors. When considering annuities, you should work with a Financial Advisor to understand the available annuity products and features in order to find one that aligns with your financial needs and goals. “An annuity should be viewed as a long-term component of an investment strategy,” Fritz says.

Among your considerations, think about whether you need income now or in the future:

  • Immediate annuities are typically purchased with a lump sum and begin paying income right away.

  • Deferred annuities allow you to make a one-time payment or contributions over a period of years or decades. Generally, you can then choose when to turn those accumulated funds into a regular stream of income.
Immediate and deferred annuities further separate into three types:
  • Fixed annuities offer a predictable, guaranteed income stream for a set period of time, which is credited to your annuity value. A fixed annuity is a contract between you and an annuity company in which the annuity company agrees to pay you a fixed rate of return for a specified time known as a “guarantee period.” Because the rate of return is fixed, this type of annuity offers protection from the market fluctuations that can affect other types of investments. But today’s low-rate environment means lower guaranteed income payments, and if inflation were to rise significantly, the fixed annuity’s income stream may no longer meet your cash flow needs. Fritz notes that the average 10-year fixed annuity currently offers an interest rate of roughly 2%, considerably lower than the average rate of 6% that he saw a decade ago.

  • Variable annuities allow you to invest your principal in the financial markets through a wide range of investment options. When markets move higher, the annuity may increase in value, and when the markets move lower, the annuity may actually lose value. While the income from a variable annuity isn’t always guaranteed, it does offer the opportunity for higher returns than fixed annuities may provide. If you are seeking the potential for a higher interest payment than a fixed annuity is likely to provide but also want a reliable income stream, you may wish to purchase an additional rider to guarantee withdrawal benefits. These include guaranteed lifetime withdrawal benefits (GLWB) or guaranteed minimum withdrawal benefits (GMWB). But these riders can be quite expensive, and your Financial Advisor can work with you to help you understand whether their additional cost is worth the benefit to you.

  • Indexed annuities combine elements of fixed annuities (guaranteed income) and variable annuities (market exposure). The value of an indexed annuity contract is tied to the performance of a particular market index. You may find these annuities attractive if you want some exposure to growth but also want to limit your potential for losses if the financial markets perform poorly. Indexed annuities are complex instruments, and before you purchase one it is important to understand all the circumstances that can affect the income it provides.
Depending on how they are structured, some annuities may also provide tax and estate planning advantages, such as avoidance of probate court.

Integrating Annuities Into Your Retirement Income Plan

The amount of assets that should be invested in guaranteed sources of income differs for each investor. Your Financial Advisor can work with you to select an annuity contract and any riders. Together, you will consider factors such as your retirement lifestyle, your health care needs, your other investments and the total amount of your assets.

Fritz believes that despite their differing needs, more people could benefit from incorporating a guaranteed income solution such as an annuity into their retirement planning. The reason: Your portfolio is exposed to fluctuations in the financial markets, which can mean fluctuations in your overall asset level as well as the amount of income your portfolio is able to provide. If the portfolio doesn’t provide adequate income, you may need to draw on your capital instead of keeping it invested in the market. And that can mean missing out on potential long-term gains, reducing your overall assets. “If the markets perform poorly during the first years of an individual’s retirement, it greatly increases the likelihood of that person outliving his or her savings,” Fritz says.

Committing some retirement capital to creating a guaranteed stream of income can help you feel more comfortable with keeping the remainder of your portfolio invested in the markets. Your Financial Advisor can help you determine your income needs during retirement and explore how annuities could play a role in supporting them. “It can be a real source of confidence for an individual,” Fritz says, “knowing that when they ‘turn the income on,’ they will never outlive that check.”

Insurance products are offered in conjunction with Morgan Stanley Smith Barney LLC’s licensed insurance agency affiliates.

All guarantees are based on the financial strength and claims-paying ability of the issuing insurance company.

Withdrawal and distributions of taxable amounts are subject to ordinary income tax and, if made before age 59½, may be subject to an additional 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value. Optional benefits, such as living benefits and enhanced death benefits, are available for an additional fee.

Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk and possible loss of principal.

Variable annuities are sold by prospectus only.The prospectus contains the investment objectives, risks, fees, charges and expenses, holding period, or investment restrictions applicable to any riders and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Please read the prospectus for both the variable annuity contract and the underlying investments carefully before investing.

If you are investing in an annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the annuity. Under these circumstances, you should consider buying an annuity only because of its other features, such as lifetime income payments and death benefit protection.

CRC 756969 (10/13)



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