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Buy Your Annuities, Rather than Having them Sold to You

On The Chicago Financial Planner website, Roger Wohlner delves into a poignant topic.  “Annuities: The Wonder Drug for Retirement?” questions whether annuities are the best product for Baby Boomers or if they are falling for a sales pitch.  This is something we certainly have talked about before.  When advisors don’t look out for the best interest of their clients, annuities can be “sold” rather than “bought.”  Baby Boomers who do their research and choose to buy an annuity typically find that it is the right product for them.  Those who are sold an annuity through a pitch or advertisement often come to have regrets later on.

The article gives the SEC’s long description of what an annuity is and what it does.  They talk about the fixed, variable, and indexed varieties and how they determine your annuity rates and payments.  The SEC also points out that while variable annuities are considered securities and are regulated by the SEC, fixed annuities are not and most indexed annuities are not either.  This has been a battle in the financial industry between those who believe all annuities should be regulated by the SEC, but this is the regulation as it currently stands.

Mr. Wohlner goes on to question whether anything is good about annuities.  He points out that they do offer certainty to retirees in a very up and down financial world.  You can also plan your expenses accordingly because you know what your fixed payments will be in retirement.  As long as the insurance company holding your annuity is in good standing, you don’t have any worry related to receiving your monthly annuity payments.

What reputable advisors like Wohlner worry about when it comes to annuities are the hidden and sometimes high fees.  This is where it is extremely important for you to do your research and know exactly what kind of product you are buying into.  The underlying investments have fees associated with them, which are different based on whether you have a variable, fixed, or indexed annuity.  He doesn’t like the non-clarity of these fees when associated with indexed annuities.  Since annuities guarantee you a lifetime stream of income to last your lifetime, you have to pay mortality and expense fees to the insurer.  To put it mildly, these are not exactly uniform across products.  The last fee discussed is the surrender fee.  Mr. Wohlner is strongly opposed to products that give you a penalty when you take money out before a predetermined date.  But I have to say, I think a surrender charge is okay when you get some added benefits in return, such as guaranteed lifetime income.

Your annuity guarantees come solely from the insurance company with which you invest.  Annuitized pensions are backed up by a government agency similar to the FDIC.  There are also state guarantee agencies that will pay a minimum amount of your annuity in the case that your insurer dissolves, although you might not get all the money and will likely see a delay.  This is just another reason to do your homework and choose an insurer that is strong and will last the test of time.  It is very rare that a strong insurer would go out of business and leave you hanging.

In summary, Mr. Wohlner ponders whether or not you should buy an annuity.  He says that you must first be aware of what you can get from annuities, as well as what you cannot.  Some advisors may not point you to the best annuity product for you because the fees are low and their commissions will be less.  Honest advisors will steer you to the best product for your situation.  Fee-only advisors can recommend a great annuity for you when it is appropriate, not one that benefits them.  When diversifying your retirement portfolio, an annuity can be a great addition for Baby Boomers.  Make sure that you know the product in and out and that you “buy” it, rather than have it “sold” to you.

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