There are plenty of mixed feelings about annuities, much of which, I believe comes from lack of knowledge on the part of the consumer or the sales agent. When I first started selling life insurance, I was told that there was one type of insurance that was good and all others were bad Along the way I learned that there are many different types of insurance for different types of clients and unless you fit the right policy with the right client it will always be bad. The same can be said with annuities, there are different types and unless you fit the right annuity with the right client the outcome could be bad for the client. This blog will help you understand annuities so you can get the right fit!
When it comes to annuities one of the first things to decide is, what do you need more, income or growth? After that comes the time frame, when do you need the money, now or later? Once you have those questions answered, then you can decide if an annuity is right for you, and if so, what type of risk are you open too. To answer those questions I will refer to the above chart, so you can get an ideal of what might be right for you.
Income
Before we answer the question of income, let me say that all annuities, come with a fee of some type and a surrender charge, just like many other types of investments. What this means is that, no matter the product or service, there will be a fee somewhere along the way and that fee can affect you income so always know what you are getting into.
With that out of the way, I will discuss the income goal. If income "now" is your goal, than perhaps an immediate annuity is what you are looking for. Most annuities allow you to start receiving you payments after the first year, however with and immediate annuity, you place say 100k with the insurance company and you start collecting a check for life, after one month. Maybe you don't need the money that soon, there are plans like a fixed annuity, designed to begin paying any where between one year to 10yrs in the future, some plans allow you to receive an income stream and still retain control of your money.
As you get closer to retirement, you may want more liquidity, many plans offer surrender charge periods as low as 3yrs. The surrender charge is the penalty for talking all your available funds out of the annuity before a set period of time, this can be from 3yrs to 10yrs depending on the plan. This is a decision you will make when you first purchase your annuity, based on your comfort level and proximity to retirement, I suggest the closer to retirement, the shorter contract period. So you might say, well why would I want a longer surrender period anyway? Simple the longer the annuity contract, the higher the rate the company pays for holding your money. With the way new plans are coming out, I find that a 5-7 year contract offers a decent rate and flexibility to change with the markets.
Growth
If you have some time before y0u retire, an annuity designed for growth may better suit you needs. A fixed indexed annuity offers you the opportunity to use an index such as the S&P 500 to generate a higher returns in your annuity, while protecting your funds from loss by offering a stated minimum interest on your funds placed with the annuity. This type of annuity is considered a, safe money annuity, because the company bears the majority of the risk. If the S&P is high over the last year, good for you and the company. However if the S&P took a loss over the last year, the minimum interest rate is your safety net, and the company bears the the index loss,
Next on the growth scale are registered linked index annuities and variable annuities. These plans offer greater growth potential, which comes along with the risk of loss. The major difference between these and the fixed annuities:
"The fixed indexed annuity (FIA) is a fixed annuity that calculates its returns based on index performance, with predetermined limits on the upside return, and never returning less than 0%. The registered index-linked annuity (RILA) may have a negative return, so it is registered as a security and can only be offered by a professional with a securities license. These are also known as structured, buffered, or indexed variable annuities".-NAFA
Again these types of annuities are designed for someone with a high risk tolerance and ample time before retirement. Placing someone two or three years from retirement in this type of annuity could be a recipe for disaster.
As you can see, as long as you work with an advisor who understands your retirement goals and puts a plan in place to meet those goals, annuities can be a great way build and supplement your retirement.
Feel free to post any questions or comments, thank you for reading and have a good day.
TJ Hines
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