Is an Annuity Right for Me?
Taking the confusion out of annuities
This is a question I get often whether out for an evening with friends or at a family function. People are curious. They hear a lot about annuities, and even people who claim they don’t like them are still interested in learning more. What is it about annuities that continues to be so compelling? It could be that they can provide a contractual guarantee that you won’t lose your principal. People find that hard to believe especially if they’ve been in the stock market for a while. And secondly, investors are often skeptical that you can receive an agreed upon payout regardless of market conditions and even create an income for life. I’ve heard this dozens of time that it is just “too good to believe.” And this really blows people away.
Fixed indexed annuities can provide both of the above guarantees and also an opportunity to profit from the markets when they go up but take no loss when they go down. It’s income with control.
Fixed Index Annuities with Income Riders
The fixed indexed annuities pay interest based on a particular index fund such as the S& P 500 but you only receive a portion of the increase of the index based on a cap in exchange for experiencing none of the downside. There are also indexes that use an uncapped strategy by using a spread, which allows unlimited potential after the spread of a certain percentage has been met. This is different from a fee because you have to make money before they take the spread, where a fee is charged on the balance of the account.
But, as you may have surmised, not all annuities are created equal. I often give clients an analogy of a car. You can get a car with a four-cylinder engine, which will get you from point A to point B, or you can get to where you are going faster and in more comfort in a car with eight cylinders and leather interior. It is much the same with annuities. Sometimes we see between 15 and 30 percent more income by utilizing different strategies.
Variable Annuities
There are a number of annuities that do not protect your money from market downturns. Variable annuities for instance can make substantial gains in strong markets but can also expose you to loss of principal in weak markets. This is a combination of insurance and sub accounts that use mutual funds. They also typically have fees that can range from three to four percent each year.
WHAT IS IT ABOUT ANNUITIES THAT CONTINUE TO BE SO COMPELLING? IT COULD BE THAT THEY CAN PROVIDE A CONTRACTUAL GUARANTEE THAT YOU WON’T LOSE YOUR PRINCIPAL.
Immediate Annuities
Immediate annuities are where you give the insurance company a lump of money in exchange for starting payments immediately. They can also subject you to loss of funds which would have been received through a structured payout, should you die early.
Think of this like a pension, when interest rates are high your payout would be more. The insurance company takes your age and current interest rate to determine your payoff. Your money stops growing, which makes this a less desirable option.
Things to Consider Before Getting an Annuity
An annuity can offer a higher cash flow in a low interest-rate environment. And, if you have longevity in your family tree, an annuity with a rider to create lifetime income may make it even more appealing. Many even offer a feature to double the payout for a number of years should you need home healthcare or long-term care.
Having an annuity of any kind does commit your money for a period of time, similar to a CD. Some do allow you to take out 10 percent a year without penalty, but if you need more of your money before the end of the agreed upon term, there is a surrender charge. Therefore, if you want total liquidity, an annuity may not be your best investment.
Is an annuity right for you? Only you can make that decision. Get the facts on annuities, and make sure you understand how they work. Then you can determine if an annuity could be the right option to secure your financial future.