Annuities and Annuities agents have a bad reputation. In some cases it is well deserved. There are agents who do a poor job of explaining the features, limitations and costs associated with annuities.
Let’s examine some of the reasons why you shouldn’t buy annuities:
Lack of Liquidity: True – Annuities have this limitation. If you wish to withdraw your funds prior to age 59.5 you will likely be subject to early withdrawal penalties, taxes and fees. Keep in mind many retirement accounts also have this limitation. Ironically setting up an annuity is one way to access an IRA account without an early withdrawal penalty.
High Fees: True sometimes – There are several different types of Annuities and the associated costs and fees can vary greatly by type and carrier. In general the more complicated the investment choices the higher the fees. Variable annuities are an expensive way to invest in the stock market.
Taxes: Partially True – Annuities grow tax deferred and the earnings are taxed at ordinary rates upon withdrawal which could be higher or lower depending on your tax bracket during retirement. In addition the increase in value does not get a step up in basis upon death.
Low Interest Rates: True – Current annuity rates are at the low end of historical rates. The same can be said about CD and Bond rates. That said there are guaranteed annuities that provide higher returns than both CD’s and Bonds.
Why would I buy an annuity?
Income stream for as long as you live.
Participate in some of the stock market gains with no downside risk.
Additional opportunity for tax deferred growth.
What are the types of annuities?
Annuities fall into two major categories: Immediate Annuities and Deferred Annuities.
The way you fund annuities can vary. There are Single pay annuities that are funded with one lump sum payment or annuities that you fund over a series of installments.
The most important thing about an annuity is how does your money grow and the safety of the principal. The basic methods are as follows:
Fixed Annuity – Earns a specified rate of return for a specified period of time. Be sure you understand what the guaranteed rate will be and how long it lasts.
Indexed Annuity – Lets you participate in growth of an index (usually Stock) and provides protection during downturns in the market. These can be attractive in a volatile market but they do have higher fees and at times complicated formulas for calculating gains.
Variable Annuity – Allows for a variety of investments which can increase or decrease in value. No guarantee of return or principal. Usually come with high fees and expenses.
Before you buy an annuity as with any other major financial decision you need to be informed.
Some questions to ask:
What are the guaranteed returns?
What are the fees, caps and surrender charges?
How long does the income last?
Will my heirs receive the remaining balance upon my death?
Annuities are not as great as they are sometimes made out to be neither are they as bad as they are made out to be.
If you want to guarantee income for the rest of your life, fixed annuities are well worth consideration.
If you want to roll the dice a little and take a chance at greater return but still protect your principal, indexed annuities are worth a look.
If you want to ride the ups and downs of the stock market, invest in the market. Variable annuities are an expensive way to invest.
Rates, fees and charges vary greatly from product to product and company to company. The devil is in the details. If you feel an annuity might be for you. Find an independent advisor you are comfortable with, you should not feel pressure. Get several quotes from different insurance companies and ask a lot of questions.