A lot of my past investment experience and education has involved annuities and even as a professional, I could be overwhelmed by the complexity of the products available. Ideally you or the professional who sold you an annuity should be able to tell us why you bought that annuity. There are a lot of complex annuities out there, they can be expensive, and they can serve a valuable purpose. The question is if they are serving a valuable purpose for you?
Step one is to know what you have by answering three questions. Is your annuity helping you accumulate savings or are you using it in your income phase? What is the fixed rate guarantee, if any? What are the financial ratings of the issuing insurance company? Any “guarantee” is only backed by the full financial faith and credit of the underlying insurance company not any equivalent FDIC insurance so this is incredibly important.
Some very specific annuities can be good for the accumulation phase of investing but, in general, an annuity’s most valuable function is in the income phase where it is a base building block of your financial safety net. The basic relationship between you and the insurance company is a higher guaranteed rate of return for a longer commitment (think 5, 7, or 10-year surrender charges) to leave your assets for the insurance company to invest. Fixed interest rates have been so low for so long that insurance companies have gotten creative about these guarantees and that’s where annuities get confusing. “6% guaranteed” might mean you are getting 6% fixed interest in year one and 1% in year 2 through 10; it could mean that the investment is in the variable market but there is a guarantee that your “income benefit” will always grow by the higher of your actual return or 6%; it could mean that if you don’t start withdrawals until after you are 75, you are guaranteed 6% of your balance as annual income as long as you live. Those are 3 completely different definitions under the umbrella term “6% guarantee”.
Our financial planning process can help you to answer these defining questions. An annuity can give you peace of mind that your core expenses in retirement are being met by a stable “guaranteed” stream of income. For certain clients, an annuity can allow you to enjoy a little more of your savings during what I like to call your go-go retirement years without sacrificing the assurance that money will be there to take care of you in your slow-go retirement years.
Annuities can be a valuable part of your portfolio, however, they can go wrong when the salesperson doesn’t fully explain the product. They are not appropriate for every client. If you don’t understand what you are being sold or told, you are not with the right financial professional. You have the right to ask them to explain the annuity every time you meet and they should be able to explain the features, expenses and value to your personal situation each time you ask. If you already have one in your portfolio, we can help you position it to serve its highest function within your asset strategy. If you have an annuity that it makes sense to surrender, we can help with the tax and fee pitfalls of exiting. If a future annuity purchase is right for you, we will direct you to the annuities and financial professionals who meet our highest standard of professionalism.
Marietta Hall, CFP®