Annuities: Good, Bad, the Ugly?

Maybe you have heard of them, maybe you haven't. Annuities are one of the least-talked-about financial strategies that many financial advisors won't bring up. Why?

One reason could be that many advisors don't view Annuities as a financial investment (we talk more on whether this is true). Second reason, could be that a stock advisor can't sell you an annuity so they wouldn't be making any commission or income from the sale (shouldn't they have a fiduciary responsibility to you?).

THE GOOD

Think of Annuities as guaranteed income for the rest of your life. What I mean by this is that Annuities have the ability to protect your money and provide you income all the way through until you die, even if the money you had in your Annuity runs out before your death. You, in a sense, are creating a pension for yourself. If you are fortunate enough to work for a company that still provides pensions, take advantage of that opportunity because we are seeing more and more companies get rid of pension programs in their company. 

  • I'm a firm believer that a great retirement strategy involves having multiple "buckets". These buckets are different areas in which your retirement income will be pulled from. We know that diversification is important in any stock portfolio, well the same is true when you are planning for retirement and the different income streams you will have. Each bucket will have different tax implications and react differently to the market. Using an Annuity to help you hedge against the market's losses and still guarantees you a monthly income is a great strategy to have in your portfolio. 
  • You can take advantage of the high's and none of the lows. Sound too good to be true? There are types of Annuities that guarantees this type of performance in any market. The market crashes of 2000 and 2008 did a financial disaster on many people's 401k's. If you were one of the un-fortunate ones who had your money heavily invested in the market at that time, you probably have just now started to begin to sleep. The market in '08 took a -37.22% drop in value and if you had your money in the market '01-'03, you saw three years of negative returns. You probably are just now seeing your returns back to what you had before the market crashed 2008. The question is, "If you we were to have another financial crash in the next year or two, and you were 5-15 years away from retirement, could you actually retire with your 401k knowing that you just lost -37% of your retirement income"? 
  • How liquid is you money and can you access your funds without a penalty? The answer is: It Depends. Annuities are generally locked into a contract for a certain period of time before you can have full access to your money. This is because the insurance company wants to invest your money into other markets and make their return before paying it back to you. So is your money untouchable for "x" amount of years? No. In a Fixed Indexed Annuity, you have the ability to withdraw 10% of the accumulated funds available with no penalty. This is a great option if you want to pull some of your money out for other investments or purchases. Many people will also use this 10% withdraw to be used as a way to bridge an income gap in their retirement income until other funds (401k's, IRAs, SSI, Disability...) are able to kick in.

THE BAD

  • Remember my second point about Annuities not losing? This is absolutely true but the only downside to this is that life insurance companies will usually put a cap on the amount of gain that you can get in a certain year. In 2013, there was a 32.43% gain in the market. If you had your money in an Annuity, you would only be able to take advantage of whatever that cap that is set in the contract. Often times it ranges from a 7-15% cap depending on the type of Annuity. Is this really that bad though, considering that you are protecting yourself from any of the negative downturns? This is part of the risk that you are paying for too keep your money safe in an Annuity. 
  • If you are needing your money to be completely liquid, then an Annuity may not be the right fit for you, UNLESS... Unless what? Well, remember that you are able to withdraw up to 10% of your accumulated funds without any penalty but some Annuities have a built in rider that allows you to withdraw all of your funds in the event of a terminal illness or nursing home care. You also have the ability to choose how long you want your funds to be locked in for. This would be determined on what purchases, expenses or investments that you see yourself having over the next several years. 
  • Fees associated with Annuities are front-end loaded fees. Unlike many of your 401k's and IRAs that have several front-loaded, annual and back-end loaded fees, Annuities generally will see their slowest growth in the first couple of years because of fees and growth of money that the insurance company is using. Don't worry though, that growth will catch itself up after the first several years. 

THE UGLY?

  • In all honesty, there aren't that many ugly sides to Annuities. An Annuity can be a great vehicle for you if you are looking for diversity in your retirement portfolio when planning for retirement. It is a great vehicle to keep your money safe from the downs of the market but also a great tool to take advantage of the ups in the market. 

I've said this once and I'll say it again. THERE IS NO ONE SOLUTION FOR RETIREMENT! Any advisor that says that they have that perfect tool for retirement should be stayed away from with a 39 1/2 foot pole. A good advisor will explore many options for you and take the time to understand your goals, desires and needs. If you have any questions or would like to explore further on how you can have a solid financial plan for your retirement, please give me a call and we can set up a NO COST meeting with you. 

Johnny Nuanes