Are annuities a good investment for retirees? Next to investing in your company sponsored retirement plan, they are the best in my opinion. Annuities are sold directly from an insurance company or from other financial institutions (including banks) that act on behalf of the insurance company. Annuities are also sold from independent financial advisors licensed in their state of residence. Independent financial advisors are not representing only one company, so they have many choices.
I Am About to Retire; What Should I Do?
You can consider rolling over a portion of your company plan into an annuity. Please discuss this with your financial advisor to determine if this is a suitable recommendation for you. If a guaranteed lifetime income stream sounds worth considering then definitely look into an annuity. In exchange for your investment, the insurer agrees to make periodic payments for a set time period. It’s important to remember that some annuities may lose value. These products are not insured by the FDIC or the FDIC-insured bank or savings institution that may offer them.
What Are The Different Kinds of Annuities?
There are different types of annuities. A “fixed annuity” provides a fixed payment, often monthly, until the investor dies. It typically guarantees no loss of principal (the amount invested). A “variable annuity” also guarantees payment for a set period, but the payment amounts will fluctuate based on the market performance of the investment options you choose. With a variable annuity, you also risk losing principal as well as earnings, although some variable annuities guarantee the return of your initial investment for an additional fee.
The annuity I most often recommend is a Fixed Index Annuity. This annuity is tied to the performance of a specific stock or bond index, but not directly invested in the markets as the variable annuity is. You and your advisor determine your participation rate and crediting strategy. At the end of the crediting period if the index is up your investment makes money. Here is the best part. If the index is down, you lose nothing. Your principal is guaranteed against loss. You just don’t make anything during that time period unless you have some money allocated to the fixed account. So, upside potential of the markets, no downside risk. Nice! This is also the annuity I use to create what I call your Personal Pension!
You can structure any annuity to provide a lifetime income stream. If the income payments are deferred to some later date, the annuity is typically described as a “deferred annuity.” If the payments begin immediately and continue for life, the annuity may be referred to as an “immediate annuity.”
Annuities Can Supplement Retirement
On the plus side, annuities provide another investment option if you’ve reached your contribution limit on your other retirement accounts, such as 401(k) plans. And, at retirement, the guaranteed payments can provide extra income. But, as with any investment, be aware of the potential pitfalls and make an informed decision.
Know the key features and costs of the product and make sure they fit your needs. Read the literature to understand the most important facts and risks, including the potential for loss, if any.
Who Can Help Answer My Questions?
“A financial advisor who talks to you about purchasing an annuity is required by federal law to ask you questions about your investment goals, current finances and future retirement plans,” said Kara Ritchie, an FDIC Policy Analyst who specializes in consumer issues. “If the advisor doesn’t discuss whether the product is suitable for your needs and goals, take your business elsewhere.”
Experts generally say that annuities with guaranteed principal and income are more suitable for older investors than annuities that may, through market performance, lose value. The latter include variable-rate, deferred-payment annuities and equity-indexed annuities (those tied to the stock market), which might not make sense for many investors close to or in retirement.
Also, before you sign a contract, make sure you understand the cost of getting your money back early. Many investors with variable annuities are surprised to learn that they must pay hefty “surrender charges” if they try to withdraw money early, cancel their contract, or replace an existing annuity with a new one.
Deal only with a competent, reputable financial advisor. Most annuity advisors are trained professionals. However, there have been reports of financial advisors who have been poorly informed or have used false or misleading tactics to sell annuities. How can you improve your chances of getting good advice?
Work with a financial advisor licensed by your state government’s insurance regulator. If the financial advisor offers variable annuities, he or she also must be licensed to sell securities. For information on whether a financial advisor is properly licensed or has a history of disciplinary problems, contact your state securities regulator and the Financial Industry Regulatory Authority (FINRA,) a self-regulatory group for the securities industry.
“Annuities are generally sold on a commission basis, so it’s important to find a financial advisor who puts your interests ahead of his or her own,” added Ritchie. Financial professionals who are held to a Code of Ethics and a Fiduciary Standard which by definition is putting the interests of the client first are CERTIFIED FINANCIAL PLANNERS™. The author of this post is a CFP® and is Insurance licensed in the State of Nevada.
Proceed carefully before replacing an existing annuity with a new one. A financial advisor may suggest investing in a new annuity paying a higher return or replacing a deferred annuity with an immediate annuity to provide monthly income now instead of later. These actions may make sense for some people. However, it can be expensive to exchange annuities. Make sure you consider the contract terms as well as early withdrawal penalties and other charges prior to making a change. Exchanging annuities will be subject to suitability and scrutiny by the Insurer. It is not as easy to achieve as it once was.
What if, soon after purchasing an annuity, you have “buyer’s remorse” or find another annuity with better terms? Your annuity may have a “free look” period during which you can cancel without penalty. If yours doesn’t and you still want to cancel, determine all the surrender charges and penalties and proceed with caution.
As With Any Major Decision In Life
Do your own homework, ask around. You may be surprised to find that many of you friends, colleagues and family members have sought the advice of a financial professional and can give you a referral. They may already own an annuity, many retirees do. Please do not get your specific financial advice from a non-professional. You may very well regret doing so. I can site many examples of this scenario going south on many fronts from lost money to lost friendships and family strife.
Are annuities a good investment for retirees?
As always, I invite your comments or questions below. I will respond ASAP!