Are Annuities Only Good for the Person Selling Them?
I was in the police station the other day getting fingerprinted (required by FINRA for all registered insurance reps) and as I was pulling up my sleeves to stick my finger in the ink, the police officer asked me why I was there. When I told him that I’m a registered investment representative and it’s something we all have to do, he told me that he studied for the Series 7 exam to become a financial advisor before he got promoted and decided to keep his job as a police officer.
“Annuities? I hate annuities”
Somehow, the topic of annuities came up and he looked me in the eye and said “Annuities? I hate annuities – they have high fees and are only good for the person selling them!” I was so caught off guard that I changed the conversation to baseball instead (go O’s!).
But the reality is, “I hate annuities!” is something I hear all the time, usually from people who don’t work in investments. I can only guess they’re repeating what they’ve heard from some sort of media.
Annuities Might Be Wrong For You, or They Might Be Right
Based on what little this police officer was telling me about himself, annuities probably were the wrong choice for his portfolio. But that doesn’t mean they‘re wrong for everyone.
Annuities have been maligned for years as expensive gimmicks, but now they are shining in a big way, and many financial advisors are recommending them to clients for whom they are a suitable choice. Annuities can be great for retirees and those approaching retirement who just want their money to last as long as they do.
Fixed Annuities Might Be A Good Choice For:
- People who are looking for a conservative place to put their money. Fixed annuities are not designed to “beat the market.”
- People who can afford to have their money tied up. Some annuities allow you to withdraw small amounts of your money each year without penalty, but it’s important that you have a separate emergency fund outside of your investment accounts to give you immediate access to penalty-free money if you need it.
- People who are looking to reduce their current tax bills. Tax deferral will help you lower your income tax and increase your earnings. However, the IRS does not give you double tax benefits, so if your money is already in a IRA, moving it to an annuity will give you continued tax deferral, but will not add any tax benefits you didn’t already have.
- People who want an income either now or in the future to provide a more comfortable lifestyle. Annuities can be an excellent provider of reliable income. (Of course, it’s important to remember that insurance and annuity product guarantees are subject to the claims-paying ability of the issuer.)
You May Want To Consider Another Option If:
- You are going to need that money early on. Normally, once money goes into an annuity, it’s locked up there for a while. While some will allow you to take a small bit out each year, typically if you withdraw early, you will experience surrender charges, not to mention the income tax on top of that. So if you prefer the access to your account more than the cash flow you may get, it might be good to look at another option, like one with very low surrender fees.
- You want more flexibility. Fixed Annuities are just that: fixed. They aren’t tied to the market, so you get a steady rate. This can have a couple problems that go along with it. For example, it does not adjust with inflation. So you will continue getting the same rate, in theory, but you may see a net loss. There is not growth in the account, except for the interest rate that is included in the contract. As stated before, in most cases, you may not be able to take it out without a fee. The fixed annuity allows you to count on not losing money should the market go down, but also will not increase if the market goes up.
- You don’t know what the annuity entails. Be sure to know what is happening to your money. You don’t want anything to be a surprise, considering it is your money and your life. Make sure that you know how long the money needs to stay in the annuity, what fees may be involved, and what your position is. Do your homework and don’t be afraid to ask for help!
Not Everyone Knows Everything
The bottom line is that it’s usually not a good idea to believe something just because you heard it, even if you heard it from a reputable source (including your advisor). Everyone has their opinions, and many people have some sort of agenda. Take the time to do your own research, try to remain objective, and look at both sides of the argument. Look at both the positives and the negatives and determine for yourself if annuities are right for you.