Annuities have a bad rap. When I listen to the weekend financial gurus on talk radio, the shows alternate between financial advisors trying to tell me that annuities are a bad investment and financial advisors trying to sell me annuities.
Actually, they’re both right. The advisor who says they are a bad investment is right, but only on a technicality. Annuities are guaranteed contracts with Insurance companies. They are not investments. And if used as an investment, annuities ARE bad. They’ve got high surrender charges and if you try to get out of the contract, you’re going to pay a penalty. But that’s really the only bad thing. Do you know how you can fix that? Don’t get out of the contract!
Annuities are not investments. They are a contract with a life insurance company to provide guaranteed income for either the rest of your life or a defined period (10 years, for example). And since it is a lifetime contract and they are providing a guaranteed income stream for your lifetime, the insurance company incurs expenses in underwriting the contract. So if you decide that you want out of the contract in a few years, they are going to charge a fee to break the contract.
So if you are the kind of person who likes to get in and out of investments, annuities are not for you. Don’t buy them. Really. Its those people who complain about their experience with annuities and gives them an undeserved bad rap.
If, on the other hand, you intend to honor the contract and hold the annuity until you retire, Annuities are a great retirement asset (not investment!).
- Annuities provide excellent returns while protecting your principal. Much better than CDs and bank deposits.
- Annuities provide tax-deferred growth.
- Annuities are guaranteed contracts backed by claims paying ability of billion dollar insurance companies, many of which have been around for well more than 150 years.
Annuities deserve a place in your retirement portfolio
Many investors try to reduce risk in their retirement portfolios by moving from equities (Stock Market and Stock Mutual Funds) to debt (bonds and treasuries) as they get older. Annuities area a safer asset class than bonds. Bonds are securities that are traded in public exchanges. Their values change daily based on interest rates.
If interest rates rise, the holders of bonds with the old, low interest rates must accept a lower price otherwise no one would want to buy them. Conversely, if interest rates fall, the holders of bonds with older, higher interest rates have something that everyone else wants. The price of those bonds with higher coupon rates will be bid up higher.
Annuities offer options with both debt and equity market-linked crediting options without the price volatility and risk to principal. And even better, many new Annuities have long term care insurance bundled in. You may receive some multiple of the face value of the annuity, tax-free, if you need long term care.
Watch my video showing why an annuity may be better than annuitizing your retirement savings:
Read my blog article that debunks the “Annuities are a Return of Premium” Myth:
Bottom Line: An annuity is a guaranteed contract that will yield a very competitive rate of return and an income stream that you can’t outlive. As long as its not surrendered, the fees are actually very reasonable. They can be designed to pay out over multiple lives so that both you and your spouse need not worry about running out of income. They can even be designed to pay the remaining balance to another beneficiary upon the death of the original annuitant. It’s a very flexible and customizable product with the latest iterations including tax-free long term care benefits.
A retiree shouldn’t have to stress out wondering if the next market crash is going to wipe out their savings or if they will outlive their savings. Trust your retirement planning to a true professional, not an internet marketing guru.