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Why You’ll Never Get a Straight Answer About Annuities

I recently came across a question in a women’s financial group that perfectly captures why so many people are confused about annuities.

A woman asked a simple question: “A gentleman wants me to invest in an annuity. It sounds too good to be true. What do you think?”

The responses came flooding in.

“Run away.”

“My annuity saved my retirement.”

“They’re terrible.”

“They’re wonderful.”

“They have high fees.”

“They’ve given my mom guaranteed income for years.”

“The salesperson earns too much.”

“They’re perfect if you’re conservative.”

“They’re a scam.”

Reading through the comments, I realized something. No one was really talking about annuities. They were talking about their annuity.

There Isn’t Just One Type of Annuity

Imagine asking: “Should I buy a car?” Would anyone be able to answer? Of course not.

  • Do you need a pickup truck?
  • A hybrid?
  • A sports car?
  • A minivan?

Annuities are exactly the same. There isn’t one annuity. There are dozens of different products with different purposes. Some are designed to:

  • Protect your principal.
  • Generate guaranteed lifetime income.
  • Participate in market growth.
  • Leave money to your beneficiaries.
  • Reduce longevity risk.

Others may have features you don’t need—or fees you shouldn’t pay. The question isn’t whether annuities are good or bad. The question is whether this annuity is appropriate for your situation.

Why Opinions Are So Polarized

Many people have strong feelings about annuities because they’ve only experienced one. Someone who purchased a high-fee variable annuity 20 years ago may tell everyone to avoid annuities forever. Someone whose guaranteed lifetime income allowed them to stay in their home after their spouse died may believe annuities are the best financial product ever created. Both experiences are real. Neither tells the whole story.

The Better Questions to Ask

Instead of asking, “Should I buy an annuity?” ask:

  • What problem is this annuity solving?
  • What happens if I never buy it?
  • What are the fees?
  • How does the advisor get paid?
  • What guarantees are backed by the insurance company?
  • What happens if I need my money early?
  • What happens when I die?
  • How does this fit with my Social Security, investments, and other retirement income?

Those questions matter far more than whether someone on the internet loves—or hates—annuities.

Here’s What I Believe

I’ve seen annuities dramatically improve retirement plans. I’ve also seen annuities that never should have been sold. I’ve seen widows who slept better because they knew another paycheck would arrive every month. I’ve also met retirees who paid for features they neither needed nor understood. The difference wasn’t the product. It was the planning.

The Bottom Line

An annuity is a tool. Like any financial tool, it can be incredibly valuable when used appropriately. Or it can be completely unnecessary. The goal shouldn’t be to buy—or avoid—annuities. The goal should be to build a retirement income plan that gives you confidence. Sometimes an annuity belongs in that plan. Sometimes it doesn’t.

The right answer isn’t found in a Facebook comment. It’s found by understanding your goals, your income needs, your risk tolerance, and how every piece of your retirement puzzle fits together.

That’s why the question isn’t: “Should I buy an annuity?” The better question is: “Is this annuity right for me?”

To learn more, download a copy of Her Guide to Annuities here.

What is an Annuity & Why Should I Consider Them for My Retirement Plan?

Annuities can be a valuable component of your retirement plan and income during your retirement…depending upon your goals and objectives. Like all strategies we review here in our blog, we strive to provide objective, independent and truthful information.

What is an annuity and how can it benefit you? Annuity contracts are purchased from an insurance company. The insurance company will then make regular payments — either immediately or at some date in the future. These payments can be made monthly, quarterly, annually, or as a single lump-sum. Annuity contract holders can opt to receive payments for the rest of their lives or for a set number of years. The money invested in an annuity grows tax-deferred. When the money is withdrawn, the amount contributed to the annuity will not be taxed, but earnings will be taxed as regular income. There is no contribution limit for an annuity.

There are two main types of annuities:

  • Fixed annuities offer a guaranteed payout, usually a set dollar amount or a set percentage of the assets in the annuity.
  • Variable annuities offer the possibility to allocate premiums between various subaccounts. This gives annuity owners the ability to participate in the potentially higher returns these subaccounts have to offer. It also means that the annuity account may fluctuate in value. Indexed annuities are specialized variable annuities. During the accumulation period, the rate of return is based on an index.

Watch this video to learn more about Indexed Annuities and how they can help your retirement plan.

Case Study: Robert’s Fixed Annuity

  • Robert is a 52-year-old business owner. He uses $100,000 to purchase a deferred fixed annuity contract with a 4% guaranteed return.
  • Over the next 15 years, the contract will accumulate tax deferred. By the time Robert is ready to retire, the contract should be worth just over $180,000.
  • At that point the contract will begin making annual payments of $13,250. Only $7,358 of each payment will be taxable; the rest will be considered a return of principal.
  • These payments will last the rest of Robert’s life. Assuming he lives to age 85, he’ll eventually receive over $265,000 in payments.

Robert’s annuity may have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. His annuity also may have surrender fees that would be highest if Robert took out the money in the initial years of the annuity contact. Robert’s withdrawals and income payments are taxed as ordinary income. If he makes a withdrawal prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

If you’d like to chat with an affiliated advisor about annuities and incorporating them into your retirement plan, let us know by requesting a 1-on-1 discussion. We’re happy to help.