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Don’t Generalize Annuities as Good or Bad

Jefferson National’s President Laurence Greenberg wrote a rebuttal to anti-annuities Ken Fisher in an article for Think Advisor. Greenberg says that “Annuities Are Neither Good nor Bad – as Long as Clients Come First.” In the Q & A with Fisher, he basically said that annuities (especially the variable type) are bad, a position he’s been spreading around the media for awhile. Financial industry experts Dr. Wade Pfau and Dr. Moshe Milevsky quickly rebutted him with information showing how annuities (especially immediate annuity products) can be quite valuable retirement tools. Greenberg says in this article that the main problem he sees with annuities is the false public perception about the products. He says that whether an annuity is good or bad depends fully on the client and the advisor. If you’re looking to purchase a variable annuity, you have to balance your level of risk tolerance and individual financial profile with the benefits and costs of the product. Your advisor should help you research products to find an annuity that offers low costs, high value and a certain level of transparency.

Variable annuities seem to be the most hotly debated type of annuity, so Mr. Greenberg explained the pros and cons of the three main types. Immediate annuities are sometimes called income annuities or single premium immediate annuities (SPIAs). They are the most similar to private pensions and generate an income stream because they pool the mortality risk of many people. Immediate annuities pay out a guaranteed stream of income either over your entire life or for a specified period of time. They are good for clients with higher risk aversion and those expected to live a long life. There are two main risks with this type of annuity. You lose the ability to manage your underlying investments and there is the risk that you die younger than expected and miss out on some of the long term value.

You can also annuitize deferred variable annuities to create an income stream, but they are most often used as a way to defer taxes while investing in underlying subaccounts. Many of these products offer living benefits that will protect your principal and your future withdrawal. Variable annuities with guarantees are good products for the risk averse, those who aren’t worried about leaving that money to their heirs and those who have a negative view about market performance. Some of these products have high fees that almost negate the value of their tax deferral benefit, so that’s an important factor to consider. Some of the guarantees also limit the investment options that you have. Volatile markets and low yields for insurance companies have made some variable annuities more expensive because they are more expensive for the insurers. That’s leading to an increasing interest in the next type of variable annuity.

Investment-only variable annuities (IOVA) are a reinvention of the product originally introduced as a variable annuity. They are low cost, pay no commissions and offer a wider range of underlying funds from which to choose. These products are helping people invest their money tax deferred to grow their wealth both before and after they retire. IOVAs do not offer guarantees, which many advisors like because they can more directly manage their clients money. Wade Pfau’s research findings determined that investment-only variable annuities could generate income just like deferred annuities with guarantees, but IOVAs offered more upside potential and the ending account balance was higher. These products are good for clients who want more flexibility with their investments, are looking to generate income and leave a financial legacy, and those who think that their spending in retirement be on pace with inflation.

It’s doing an injustice to consumers to classify all annuities, even variable, as bad. Moshe Milevsky says that annuities need a rebranding, something that Stan “The Annuity Man” Haithcock would likely agree with. Annuities offer unique benefits to consumers and can be a valuable retirement income planning tool. Some annuities are bad and certain products are bad for certain people, but annuities in general can be a useful way to create income in retirement or grow your money tax deferred. Variable annuities offer market participation, but protect your money in a way that is not possible with direct market investments. If you have any questions about variable annuities, or any other type, speak with an expert at Annuity FYI.

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