Annuities
What is an annuity?
An annuity comes in many different options and types, however, they all have one thing in common: life insurance. Ideally, an annuity is a guarantee from a life insurance company that you cannot outlive your savings. This is done by pooling your investments together with others and whoever dies before receiving any investment return, gives the money to others. This concept is similar to car insurance or any other type of insurance with one exception; everyone dies but not everyone gets in a car accident.
Do I need it?
A long story short, annuities are mostly for wealthy people who already have maximized their retirement savings. Annuities are never the best possible financial investment for your retirement. For some, it is simply an insurance policy in case your other investments are unavailable or run out earlier than expected. Others use annuities to shelter savings, give to charities, or protect a spouse or loved one. Companies and government entities often use annuities in place of pensions because it guarantees to take care of their employees while leaving the burden on the insurance company. The vast majority of people would be better off without an annuity. Often, we assist clients with removing money from a government agency that uses a 403(b) savings plan. These plans are required by law to use annuities and often clients don’t even know they are in one.
Should I avoid an annuity?
While annuities are very well marketed and many people have purchased these products, here are a few negative aspects you should consider:
Annuities are not cost-effective (many fees, often hidden)
They are not a tax-qualified account (IRA)
Annuities limit your returns in many cases
Annuities are not easily liquidated and often hard to transfer
They are complex with a lot of rules
Once sold, your advisor receives a lump commision and may never speak with you again
If you are considering an annuity from an insurance salesman, please reach out and speak with us. While a 15-minute sales pitch from a confident salesman may be all you need to make a decision, we believe that you can gain much more money without an annuity in most cases.
How does it work?
Accumulation and income are the two phases of an annuity. First, you save up through monthly or annual payments every year until the age of retirement. Then you reach the annuitization phase where you withdraw your savings plus a portion of your interest. The money earned through stock and bond investments grows your account and in some cases guarantees that you will never lose your initial investment. When you go to collect, the insurance company calculates out a payment using gender, age, and expected return. Often the first ten to twenty years of your annuity payments are simply your own money invested. That means, if you collect at age 65, you’ll need to reach age 85 before you can make any additional income from the insurance guarantee.
What types are there?
The insurance company is in the business of investing your money to earn a profit. Annuities provide ample opportunity for profit from your investments. However, not everyone wants the safest investments. Insurance companies have found ways to provide an annuity regardless of your risk preference. Some invest in mutual funds, others in stock market indexes, others bonds. Because it is an insurance product, there are many options for additional features you can purchase. Some include a long-term care or life insurance policy rider. Others, provide guaranteed income for only a certain period. If you have a spouse, you can include them. If you want to avoid taxes or pay a charity for a long period of time, they have annuities for that as well. No matter your need, we are experts in all the various annuities and can provide them for those that want an annuity.