“Annuities remain popular vehicles for pre-retirees and retirees seeking guaranteed income throughout the course of their retirements. Yet, the way annuities are marketed often creates confusion and misunderstanding.”
By Lawrence Castillo
I’ll be the first to concede that effectively saving for retirement is a tricky proposition for many of us. Even when you are diligent and manage to accumulate and preserve capital, discovering the most effective ways to turn that money into retirement income is daunting.
Given the multitude of financial products available, it’s easy to get confused and lost in a plethora of marketing messages. For example, annuities, which have been around for centuries, are often controversial. Some advisors promote annuities vigorously, while others seem to hate them. However, even the most anti-annuity advisors tend to agree that having an annuity may benefit a well-balanced retirement blueprint.
If this is the case, you may wonder why many advisors discourage their clients from purchasing annuity products. This situation may have less to do with an annuity’s inherent shortcomings and more with how these proven financial tools are marketed. The truth is that most people who choose annuities for their portfolios end up using them in ways for which they were not explicitly created. Many people buy annuities with no intention of ever “annuitizing” them. Unfortunately, you never begin taking payments from an annuity; you may lose many of its benefits and expose yourself to more disadvantages.
There are a few reasons some people shy away from annuities, even when having one might align well with their financial goals and risk tolerance.
Using annuities means you’ll have to be more careful with your budget.
Committing a large amount of cash to an annuity may hamper your ability to deal with an unanticipated large expense. Many seniors worry that their money may be “tied up” when they purchase an annuity. However, most annuity companies offer the option of penalty-free withdrawals of up to 10%. This feature provides you with a measure of liquidity in case of emergencies. In any event, you probably don’t want to put all of your savings into any one product but instead take a more balanced approach using a variety of assets.
People are afraid they’re making a losing bet. The most significant risk of annuitization is if you die years before your actuarial life expectancy. For instance, say you put $250,000 into an immediate annuity and then pass away a few months later. Depending on your contract, your estate might only get a small portion of the premium you paid into that annuity. The idea that a potential loss will outweigh the benefit you’d get by outliving your life expectancy keeps many people from choosing annuities. But, many annuity companies offer alternative payout choices, including joint and survivor plans that continue to pay your spouse even after you die.
Why should you look into annuities?
If you’re a retiree or pre-retiree, there are important reasons to consider buying an annuity contract.
- You want guaranteed protection for your initial investment. Unlike many other assets, your initial investment in an annuity is contractually protected from loss.
- You desire a stream of lifetime income you can’t outlive. Annuities are a method of turning your savings into predictable retirement income. Income annuities are one vehicle that can help supplement Social Security payments and can also help keep you from depleting other retirement accounts too quickly.
- You are concerned about longevity. Many retirement experts believe that seniors with annuities in their retirement plans have a better chance of offsetting longevity issues. If outliving your savings is of concern, an annuity may bring you peace of mind.
- You need to leave your loved ones a legacy. You can purchase certain annuities designed so your spouse or other family member gets any money left when you pass away.
- You have maxed out your other tax-advantaged accounts. There are quite a few people who reach their maximum contribution limits for 401k or IRA plans. In this instance, an annuity might be your last tax-advantaged vehicle.
If you aren’t concerned about any of these issues, then an annuity may not be the proper solution for your situation. However, discussing them with your retirement income planner or financial advisor is a wise idea.
Summing it up: While there are some legitimate criticisms of annuities, there are also many benefits and upsides. Having an annuity in your portfolio might make good sense depending on your unique situation, attitudes toward money, and risk appetite. If you’ve maxed out your other retirement savings accounts or have received a large lump sum of money, an annuity could also be beneficial. If you value principle protection, predictable, tax-advantaged income, worry about living too long or want to leave a legacy, ask your financial advisor about annuities.