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Depends on the Annuity and...

By: StudioCity'98



...what you want to do with it.  And what TYPE of Annuity one buys. Without writing a book on them I'll just speak about one type, they are called "Fixed Index Annuities."  I say that because I'm a Fiduciary Investment Adviser [legal term].  I have a Fiduciary duty to my clients that means by law I'm required to place their interest before my own.  I get paid for Advise only. Fee-for-service. Just like a Physician, Attorney or Accountant.  [We also happen to be Tax, 401(k) & Pension Planners.]

 

This is, as opposed to a Series 7 Broker [or legally known as Registered Representative], who gets paid by commission for selling certain products to their clients. And, more importantly, they have no such Fiduciary obligation to their clients. In fact, they are rewarded by selling more and more products, stocks/bonds..etc., regardless if it's the right thing to do or not.  Brokers also sell Annuities. But they sell a product that, IMO is horrible for the client, and conversely, is great for them because the commissions and on-going annual fees are ridiculously exorbitant.  Those are called: "Variable Annuities."  My advice is to stay far, far away from Variable Annuities. Sometimes referred to by Brokers as "VA's."

 

Quick anecdote : I've quite often sat with clients who have been sold a "Variable Annuity" by their Broker and after some long period of time, say 12-20 yrs, they'll come to us and after we do the analysis we'll find out (much to the surprise and furious anger of the client) that the Broker and his firm have made more in fees and commissions than the client has made in compounded returns from the product over its entire holding period. VERY BAD DEALl!    

 

Straight skinny:

Annuities are a great product to make sure one gets income for life. No matter how long one lives, the contract with the Insurance Company is that they will pay one an income forever. Simple as that. We in the Investment Advisory biz call them "Longevity Credits."  One is self-insuring against longevity, (living too long with no income.)  Regardless of how much income one derives over the months/years from the initial capital deposited the Insurance Company is contractually required to pay the agreed-upon income for life.  Meaning one can buy a Fixed Indexed Annuity for $500,000, and then take monthly income over one's life that is greater than $500K, and the Insurance Company is still required to pay the agreed upon monthly income for life. [There are some Tax & Inheritance issues associated, beyond the scope of this note. I'd be happy to talk to you, or refer you, to talk about the finer points.]

 

Additionally, and importantly, one takes no market risk. Fixed Indexed Annuities (FIA) are tied to some stock market index. Thus the name. As the market index rises each year the FIA is credited by some large percentage of that rise, anywhere from 85% to 140% depending on the specific company, product, length of holding period, (some combination of those.) Then each yearly return is locked-in. Meaning the Annuity never loses value due to a market index decline, should one occur, and of course they always do. So, in that sense, they're considered very safe as one item in one's retirement accumulation package.

 

e.g. One buys a FIAnnuity that happens to have a 130% market index crediting value. Year 1: the market goes up by 10%, the Annuity is credited 13% [(less some fee), under 1%], for that year. Year 2: the next year the market index goes down by 10%, the Annuity is credited 0% for that year. But the nice, safe thing is that the Annuity doesn't go down that year. FIA's are credited on positive market index years, and not penalized with negative returns on down market index years. They are always locked-in at some “high-water mark.” And they do not accumulate negative returns in down market years.  Safe instruments for retirement savings.

 

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Of course, one should be diversified when saving for retirement. Some in safe instruments like FIA's, or short-duration Bonds, maybe some in Cash (T-Bills), maybe some in income producing Real Estate, some exposed to the stock market to keep up with inflation, reducing the stock market exposure the older one gets..yadda, yadda, yadda...everyone knows that part.

So, longer than I intended on writing. But hopefully that’s a clear and helpful description of Fixed Indexed Annuities, one of few types of Annuities that I would ever recommend to anyone for any thing.

[Not intended to be complete description of all types of annuities in any or all cases. Not advice. Please seek out competent Tax & Investment advisory.]   

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