Are Annuities A Good Investment?

When investing for retirement, knowing what tools you have gives you the power to choose the right financial tool for your goals. Should annuities be one of the tools you choose? Let’s compare annuities to the some of the major retirement investment tools.

CASH (CDs, money market funds, savings accounts, safety deposit box, and similar tools)

• Safety – the money you deposit is the money you can take out (minus taxes on interest.)
• Little or no growth – loss of “opportunity” to increase value to meet or exceed inflation.
• Will it meet your retirement income costs?

EQUITIES (direct investment in stocks, bonds and mutual funds with or without tax-deferred status)

• Growth – your account value increases as much as your investments.
• Risk – when your investments fall, so do your retirement savings.
• What will the value be when you need to withdraw for retirement income?

REAL ESTATE (owning property for rent or investment growth)

• Growth – the value can increase faster than the cost of owning it.
• Liquidity can be an issue.
• Value of the property is variable – what will it be when you need it?
• Income – rental property can provide income.
• Can become an expense instead of income when empty too long.

ANNUITIES (including plans focused on income, growth, deferred tax, long term care)

• Safety – unless you purchase a variable annuity (invested directly in equities) you will be protected from loss of value.
• Growth – variable depending upon the type of strategy you pick and investment choices.
  • Fixed annuities offer a fixed interest rate – low growth potential.
  • Fixed Index annuities offer growth and safety from loss – not as much upside potential as direct investment in equities.
  • Variable annuities can offer tax sheltered investment in stocks, bonds and mutual funds – investments fully exposed to market highs and lows. Watch out for costly fees.
  • As with all investments, monitoring fees is critical. Fees for account management and additional benefit riders range from low to high between different policies and different insurance companies. A wise buyer compares fees before committing to a policy.
• Liquidity – annuities are not as liquid as cash but more liquid than real estate. When you purchase an annuity, make sure you choose a surrender period that matches your goals.

Tax-Sheltered Growth Can’t Lose Value

Some annuities focus on increasing the value of the funds invested. As with an IRA or 401(k), a tax-qualified annuity can be paid with pre-tax dollars and the increase in value is not taxable until you withdraw the money. You can choose fixed interest, fixed indexed or variable growth models (SEE above).

Selecting a fixed interest option allows your money to increase in value along with the stock market indexes offered but never lose value. When the stock market tanks, your funds stay where they were at the end of the last year. When the stock market grows, your funds grow in proportion to the rise.

Guaranteed Income You Can’t Outlive

Certain annuities focus on providing a lifetime of income based on your deposit amount and the growth of the income value (longer surrender periods mean longer growth period). Find the surrender period (from 0 to 20 years) that meets your goals and look for a plan that offers income growth after annuitization. This is one insurance you want to be certain to use. Match the income payment period with your expected lifetime to take the best advantage of having income insurance!

Cash for Terminal Illness, Chronic Conditions, or Critical Care

Most annuities have a living benefits rider available to pay for illness and disabling conditions during your lifetime. Some focus almost entirely on these benefits and can triple the money you put in to pay for terminal illness and long or short term care. If you’re having trouble qualifying for long term care insurance, an annuity could be your solution.

Safe Harbor for “Just in Case” Funds

Money invested in most annuities can be withdrawn free of charge after the first or second year. The typical free withdrawal is 10% of the account value. Withdrawals will of course affect other goals (such as growth or income) set for the policy but when you need money for the unexpected it’s good to know your cash is easily withdrawn. You can select a policy based on any gaps in your retirement funding and still have this cash withdrawal benefit.

• Tax-sheltered growth
• Guaranteed income
• Legacy for those you love
• Cash for terminal illness, chronic conditions, or critical care

Next Steps:

The next step is to evaluate your overall retirement income plan and identify weak spots. Look for gaps between what you think you’ll need and what you’ve set aside. Identify strategies where a different strategy could more closely match your goals. Click below for a complimentary conversation with one of our specialists.

Many people discover their weakest point is in dealing with long term care. Click below to learn more about how to protect your income from potentially catastrophic risk.