So the other day a client of mine asked me, “Is an annuity right for me in terms of
how it fits into my overall retirement income stream?”
And the answer that question, as with many different types of investments,
is it totally depends.
The first thing you need to do is understand what an annuity actually is.
Typically it's a contract with an insurance company where you submit funds - you invest
with the insurance company - and your funds will accumulate over time.
At some point the future, the insurance company will start paying you out money for that investment
income in the form of a lump sum or a series of payments over your lifetime - and typically
people will receive a series of payments over their lifetime.
So why an annuity might make sense for a portion of your retirement funds is to supplement
other sources of income that you may already have - so pensions, Social Security,
things like that.
So in some respects that can be a very good idea to help give you that guaranteed income
stream, which is what a lot of us are looking for.
Now there's two types of annuities.
There's what are called fixed annuities and variable annuities.
Fixed annuities are basically what they sound: you invest your money.
The insurance company promises to pay you out 3 percent per year or 4 percent per year
over the next 10 years, and then they pay you an income stream over
the rest of your life.
A variable annuity is a little different.
You invest your money and then you have the ability to put your money into different,
what are called sub-accounts, and they’re sort of like mutual funds
within the insurance wrapper.
One of the challenges with variable annuities is the fees inside the products can be extremely
high inside of those separate accounts.
With fixed or variable annuities, one of the things you absolutely want to be sure of is
that you know what the commissions are of the agent that's selling you the product.
So what I'd recommend if you're looking at an annuity, is A, work with a fee only financial
advisor that's not earning commissions off of these products.
Because then you know you're going to get the right advice for you.
Now back to variable annuities.
Why they might make sense as they might give you a little bit of a better chance to outpace
inflation because you're investing in market-type securities inside of the products.
So now your money grows over time in a fixed or variable annuity, then you start to receive
an income stream over, typically, what might be the rest of your life.
Now some of the advantages of annuities:
Number one, you cannot outlive the income stream, typically.
So if you live to 75 or 95 or 110 years old, that annuity stream continues to come in,
so long as you're investing with a reputable, financially sound insurance company.
So you want to check the ratings of the company that you're investing with to make sure they're
gonna be around in 10, 15, 20 years.
So that's typically why people use them.
One of the things you want to be aware of is today, most insurance companies have what
are called riders on their variable annuity products.
And what that means is it basically says that your money is going to be invested in these
types of mutual funds and there's a guarantee built in, in this column over here, that says
that your money is guaranteed to grow for at least, let's say, 6 or 7 percent per year
versus what the market does.
So if I invest $100,000 over a 10 year period, this guaranteed 7 percent grows to $200,000.
And then they're going to pay you out, for instance, 5 percent per year over the rest
of your life.
Well, let's say for instance you invest at 65 years old.
Your money grows for 10 years, and then it pays you out for another 20 years.
So $200,000, five percent, that's gonna be $10,000 a year.
It's going to take you 20 years just to get your $200,000 back out of the product.
So the point here is be aware of things that sound too good to be true.
Because if I could invest my clients money in a product that would guarantee them 7 percent
per year while it was growing, and then 5 percent per year while I was paying them out,
I would put virtually all of my clients’ money into it.
It doesn't work that way, there's a lot of smoke and - smoke and mirrors, excuse me,
as it relates to fixed and variable annuities.
So be cautious, beware.
I would say one of the things I would absolutely want to caution people is don't put all of
your money into a fixed or variable annuity, but a portion of it might make a lot of sense.
Beware of the commissions that are involved and the fees you're paying inside
the product as well.
And then absolutely make sure you see a fee-only financial advisor that’s looking at your
entire financial picture to give you the proper advice.
For any further information on this topic, send us an email at PureFinancial.com.