That’s all you're looking for, right?
While pensions still exist for some retirees, a guaranteed stream of income from an employer that lasts the rest of your life, unfortunately, doesn’t play into the equation for most people these days.
We understand how this loss of certainty can be unsettling. Unnerving. You might even begin thinking you need some sort of pension-like retirement product to protect your money.
Something, for instance, such as an annuity.
But as you plan for the future, be careful about giving in to these thoughts. Let’s first explain what an annuity is, then we’ll explore why they’re not the ‘no-brainer’ many would like you to believe.
First, it’s important to understand that an annuity is not an ‘investment.’ It is an insurance product.
No one ‘buys’ an annuity. It is a product that’s sold to you.
At its core, an annuity is a contract between you and an insurance company. In exchange for a lump sum payment (or series of payments), you receive a regular stream of income. This can happen either immediately or at some point down the road (known as a ‘deferred annuity’).
Annuities generally come with a surrender fee as well, meaning if you want access to your own money, it will cost you: a typical surrender fee starts out around 7% in the first year.[i]
And unfortunately, over the years, annuities have become increasingly complex. Thanks to new marketing tactics, these products that were once fairly consumer-friendly are now being touted as ‘new and improved’ – even though many are anything but.
For argument’s sake, let’s say an annuity makes sense for your situation. Is there such a thing as a 'good' annuity?
In theory, yes.
The best type is one that meets a couple of important criteria: it’s offered by one of the highest-rated insurance companies and it’s the simplest to understand with the fewest ‘moving parts,’ meaning it should be ‘fixed,’ have a relatively short surrender charge period, and come with a commission toward the lower-end of the industry scale (1-3%).
But these days, finding such a high-quality, simple annuity product like this can be a challenge. And just because it’s easy-to-understand still doesn’t mean it’s appropriate for you.
Even worse? You could be sold a fixed annuity ‘lookalike’ – a complicated indexed or variable annuity product with expensive riders promising guaranteed future income. Which brings us to…
An indexed annuity is linked to a stock index, typically the S&P 500 or an international index, and promoted as a way to protect your money from loss of principal.
However, indexed annuities generally offer lower returns than investment products, they’re illiquid (potentially locking your money up for years, if not decades) with high surrender fees, and there are a lot of internal moving parts that are not only confusing – but not always guaranteed.
It can also be difficult to receive a monthly or annual income with an indexed annuity.
A variable annuity comes with even more bells, whistles, and complexities than an indexed annuity. Your money is placed in various investment funds, called ‘subaccounts,’ within the annuity. There is no so-called ‘downside protection.’
Variable annuities can come with annual fees around 3-4%, as well as a longer-than-average surrender period (potentially up to 15 years).[ii]
And, keep in mind, since there is no ‘stepped-up’ tax basis for annuities invested in equities, a variable annuity is a terrible way to pass on your money to heirs.
As for commissions to the salesperson, you guessed it: the more complicated an annuity, the higher the commission. This would explain why the majority of annuities sold every year are variable or indexed annuities, with commissions to the agent ranging anywhere from 4-8% (and sometimes even higher).[iii]
No matter what the salesperson may tell you (such as, “I never charge a fee.”), you are paying that person, one way or another.
If a salesperson or financial advisor ever tries to sell you an annuity, we recommend asking a few pointed questions before signing on the dotted line:
And it doesn’t stop there. You should even ask yourself some questions as well:
At the end of the day, there are a few, very specific circumstances in which an annuity can make sense for someone. Despite what you may hear in commercials or read online, they’re definitely not suitable for everyone who’s entering retirement or already in retirement.
Educating yourself and knowing the right questions to ask is key.
A fiduciary financial advisor – that is, someone who’s legally obligated to always work in your best interest – can help you determine if incorporating an annuity into your retirement plan is appropriate for your financial objectives.
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1The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.
2Scott Hanson (2011, 2012, 2013, 2014, 2015 & 2016) and Pat McClain (2012, 2013, 2014, 2015 & 2016). Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
3As of 01/20, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $8 billion in total assets under management and administration.
4Barron’s 2019 Top 50 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
✢Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.
✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.
†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.