Anyone who has been investing for a while has probably heard of annuities. Either they know of someone who owns one, or they have been pitched one by their banker or their insurance agent, or they’ve been the target of an advertisement that found its way into their email inbox. For some people, annuities are some esoteric term used to in connection with old people. Yet, hundreds of millions of dollars continue to find their way into annuity contracts each year. So, somebody is figuring out how annuities can actually help them achieve their financial goals. For everyone else, let this be your primer on how annuities can help you.
Do You Fit the Annuity Profile?
Or, rather, do annuities fit your financial profile? For a lot of people, annuities conjure up the image of a stodgy investment with stingy returns suitable for older people who would otherwise keep their money in their bed mattress. While that may have been an appropriate characterization four or five decades ago, today’s annuities, and their owners, have broadened out to the extent that nearly half of the country’s population are very likely to have the right profile for one type of annuity or another.
Generally, people who can benefit from tax deferred earnings on their investments, and who are concerned more with the return of their principal as opposed to the return on their principal are candidates for annuities. The surprise for most people is that they can also help them achieve their accumulation goals with competitive returns.
Regardless of whether you view yourself as a conservative investor or one with risk tendencies, if you are one of the 50 million Americans who lay awake at night wondering if you your income will last as long as you do, then annuities may prove to be of more help than any other investment you could choose.
Help Achieving Financial Goals
The returns earned on annuities can be compared with just about any other investment vehicle. Whether you are considering fixed yield vehicles such as bank CDs or variable return investments such as mutual funds, there is an annuity that can generate equivalent returns. Fixed yield annuities are extremely competitive with the rates on CDs, and, in fact, tend to be higher in most instances. Variable annuity contracts are comprised of professionally managed investment accounts similar to mutual funds.
When you can combine competitive returns with taxed deferred accumulation of you earnings, you have faster accumulation. Annuities enjoy the same tax deferred treatment as your qualified plan, so for the assets that you accumulate outside of your qualified plan, annuities can provide the same tax advantage.
For people with diversified investment portfolios, annuities can add the much needed stability to otherwise volatile returns. Fixed annuities provide a safe, steady, guaranteed return which can moderate any decline in portfolio value. Indexed annuities with potentially higher returns linked to stock index performance also provide a hedge against declining values with their minimum rate guarantee. Even some variable annuity contracts offer an option which provides for a minimum rate guarantee in the face of a declining market.
After the big crash of 2008, and the wild market gyrations that followed, peoples’ nerves are frayed, and many who fled the market are very timid about getting back in. While many people want to be able to keep their money working harder for them, what they want more than anything is “peace-of-mind”. Annuities add extra layers of security to an investment portfolio that might allow some people to take some more risk with a portion of their money. Because the principal and earnings are guaranteed (except with variable contracts), annuities are the safety net that most investors need.
Secure Retirement Income:
It’s what everyone wants, and yet fewer and fewer people are reaching the retirement phase of their life secure in the knowledge that they will have enough income to meet their lifestyle needs for as long as they live. Annuities are unique in their ability to convert accumulated retirement savings into a guaranteed stream of income that will last a lifetime. The income payments from an annuity bring certainty and predictability to an income portfolio that could be subject to market fluctuation.
It’s not until most people get sued, or become the subject of some potentially expensive litigation or debt collection, before they begin to think about protecting their assets. Annuities are one of a few financial instruments that can find protection in most states from claims and liabilities. Each state has established its own rules for exempted assets. Some states provide for complete exemption while some may not, so it would be important to check with your state to learn to what extent annuities are exempted.
Access to Funds
: Annuity critics are quick to point out that annuities are illiquid investments because of the high surrender fees charged for withdrawals. Withdrawals taken during the surrender period that exceed 10% of the account value are charged a fee, however, the fee is reduced by a point each year until it reaches zero, after which there is no charge for a withdrawal. For most people who invest in annuities with a long term time horizon, the ability to access 10% of their funds is usually sufficient for meeting any short term need they might have.
Certainly annuities don’t fit the financial profiles of all investors, but there aren’t many that the unique features of an annuity couldn’t help in achieving their financial objectives. Annuities, as an investment alternative, should not be dismissed out of hand until they have been fully evaluated in light of your own particular needs and financial profile. When used in the context of a complete retirement planning portfolio, annuities can help you in a number of ways.