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Sorting out the Pros and Cons
This is a question that comes up more and more. If you go out on the internet, you will see all kinds of advertisements for these products. If you just plug the title above into a Google search, you will get hundreds of entries to choose from. Many of the articles and items will provide you with a balanced discussion. However, you will find many of the top placed ads to be very negative. There is even one advertiser who uses the titles “Beware of Annuities” and “I Hate Annuities and You Should Too.” Today, their banner ad (on Marketwatch.com) said “I would die and go to hell before I would sell an annuity!” Why would anyone have that kind of emotion around any financial product is beyond me!
I have sent away for their “free” report and found it to be filled with inaccuracies and innuendo that are arranged in a way to suit their conclusion; that all annuities are bad. They even make a very vague claim to pay your surrender charge if you were to cash in the annuity and pay a surrender charge.
Of course they aren’t paying the charge, just discounting their very high fee for several years to make up for the charge you paid. As a licensed Fiduciary, I could never make an offer like that; it does not put my client’s interest before mine!
This strikes me as kind of odd. There are not many investment products that seem to stir up the emotions like annuities do. Yet, when asked, most of these folks really can’t say why they “hate” them or worse, base their opinion on hearsay and not facts. Still others paint all annuities with the same brush, when there are a wide variety of types and styles out there. It’s like saying “all stocks are bad” or “buying a house is a rip off” and not having any facts to back your opinion.
Annuities are Financial Tools
They are not a religion, even though many will say “I don’t believe in annuities.” You shouldn’t “believe” in any financial products, just use the ones that serve your objectives and avoid the ones that don’t. It really is that simple. If you were looking for a guaranteed income that lasts for your entire lifetime, then you won’t find a better alternative than an annuity, period.
I feel like annuities can be a powerful tool if used properly (like any other tool). I am writing this in order to cut through some of the noise surrounding this topic, and to help you to decide if these tools might help you achieve your financial objectives.
All Annuities are not the Same!
I think some of the misunderstandings come from the variety of annuities available. Just like you wouldn’t use a Phillips head screwdriver to turn a slotted screw, using the wrong annuity will have you end up with frustration and only partial satisfaction at best. To that end, I will give you a brief overview of the main types of annuities, along with some of the pros and cons for each type. This is not intended to be a comprehensive review or recommendation about annuities, just an initial introduction.
There are Two Broad Categories, Immediate and Deferred
Immediate annuities are also called “single premium immediate annuities (SPIA), and sometimes are referred to as “income annuities” since they provide income immediately to the purchaser. The income will come on a regular basis (monthly, quarterly, semiannually, or annually) and the payments can be for a fixed number of years or for your lifetime.
With this type of contract, you exchange a sum of money for an income stream. Once the income stream has been established, it cannot be changed (unless you include a cost of living adjustment or select an increasing payment option).
In its purest form, this contract can produce very high lifetime income payouts. It really works like a pension, or your social security, except with a bit more customization available.
There is also a new category of this kind of annuity, it is called a “Deferred Income Annuity” or DIA. This can be used in a strategy to make sure that an aggressive portfolio won’t run out of money. If you insist on being fully invested in stocks or other assets that can be volatile, you can buy a lifetime income guarantee at a huge discount.
An example of this variation would be someone with a million dollar portfolio they are managing and consuming. They could buy a DIA at 65, when retiring, for an income stream that starts at some agreed upon date in the future, like 85. Under that scenario, you might put $100,000 into a DIA at 65 and you would have over $44,000 in annual income at 85, no matter how the rest of the portfolio did. You would just initiate the income once your portfolio got too low to support your lifestyle.
The Pros
- High, reliable income that you can depend on regardless of market conditions
- Can cover your lifetime, even if you run out of money
- Can cover your spouse’s lifetime also
- Can add additional guarantees in case of early death
- Advantageous tax treatment for non-qualified (not an IRA) situations
- Guaranteed
The Cons
- Once income has begun, it cannot be reversed
- You cannot change your mind after your receive your first payment
- If you use fixed payments, you might lose purchasing power due to inflation
- If the markets soar, you will not be able to use this money to invest
If you are looking for guaranteed, lifetime income that you cannot outlive, this is one of the best solutions out there.
Want to learn more? Click on the links below:
What are Deferred Fixed Annuities?
What is a Fixed Indexed Annuity?
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