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When an Annuity Will Work for You, and When it Won’t


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Whenever I see the always present articles asking “Are annuities right for you?,” I get ready to cringe at the “expert” answers.  Depending upon the source of the article, these so-called experts may not know anything about annuities and they typically generalize their responses for everyone.  As we often say in this blog, annuities are right for many people, but not for everyone.  Each annuity product and purchase has to be tailored to the individual and scrutinized in a financial planning mindset.  The latest annuity question I’ve come across is in The Miami Herald and is answered by Julie Landry Laviolette, who spoke with multiple financial experts for the article.

The article highlighted the example of a couple in their 60’s deciding on an investment for the wife’s lump sum retirement funds.  After much consideration, they chose to purchase two fixed annuities with a ten year maturation date.  Their goal was preserving the principal of the money that the wife worked so hard to save over her 44 year career.  With a focus on safety rather than growth, fixed annuities were their choice of investment.  The couple is well aware of their surrender charges and early withdrawal penalties and knows that their annuities were the right choice for their future.  While stressing that you have to know what the best choice is for your personal scenario, their financial advisor pointed out that annuities are a good choice for investors who are looking for guaranteed lifetime income.

One financial advisor interviewed, who doesn’t like recommending annuity products, dislikes their fees and lack of flexibility.  If those are your two top concerns when it comes to investments, then an annuity might not be right for you.  But this advisor does point out that there are scenarios when she still thinks they are best for her clients.  Annuities are a good supplement to social security income for middle income clients who are adverse to risk and looking to maintain an income stream throughout their retirement.  She also says that clients who have a higher income might like to use an annuity to shield their money if they own a business that might be prone to lawsuits, such as a doctor with their own practice.

Annuities are all about weighing the costs versus the benefits.  An immediate annuity is a great product for a 65-year old woman looking to put some of her retirement savings in a product that will supplement social security or pension income.  It’s probably not the best choice for a couple in their 50’s who still need to grow their money and are not yet ready for the guaranteed income payments provided by annuities.  But wealthy couples who are looking for a place to put their money tax-deferred when they have maxed out other options may find a deferred annuity useful for that purpose.

One advisor urges investors to make sure that they are comparing products correctly before making a decision.  While the annuity might have higher fees than a mutual fund, it also has benefits not offered by the latter.  As long as you know the fees and surrender charges up front, you are aware of the benefit to cost ratio.  Make sure you know the differences related to fixed equity indexed annuities because they are popular products currently, but have differences from traditional fixed annuities.  Also, while annuities do defer taxes, they aren’t the best way to do that if it is your only goal with investing.  Contracts can be long, so make sure that you or your trusted financial advisor have read through the entire thing.  Annuities are great products for those who find the one that meets their needs, but you could be in a difficult situation if you don’t do your research before finding what is right for you.

Written by Rachel Summit

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