The Truth About Annuities

What is an annuity? An annuity is a type of policy, issued by an insurance company, that pays you monthly/yearly for the rest of your life. It’s a guarantee that you’ll never run out of money 😀👍

That’s a big deal. “Running out of money in retirement” is one of the top fears of Americans today 😥

There. Shortest Smart Money Minute ever, huh?! ⏱

Just kidding! Annuities are a bit of a secret sauce; they have complicated rules, but I’m here to de-mystify that for you, today 😄

Here are the most important things to know about annuities:

• Traditionally speaking, an annuity is the opposite of life insurance. Life insurance would only pay out when you kick the bucket, push up daisies, become an ex-human; an annuity would pay you while you are alive 😀
  Interestingly, those lines are now becoming blurred. If your consultant is savvy, you can have life insurance that pays you while you are still alive, and an annuity that can still leave a legacy for your family. Insurance companies are responding to a changing market, changing their product offerings to stay relevant to consumers’ needs today; but that is a topic for a whole new article, methinks!

• Many annuities had historically low growth rates and did not compare well to investing in the market; that’s not the case anymore 📈💲

• Many modern annuities have historically low fees; some do not even charge annual maintenance fees, and are often lower-fee than market investments
  Annuities used to charge high fees- and/or many of them- because they were complicated to manage and had strict compliance regulations; much of that is automated today, so fees are lower. Also, you used to have to pay extra fees for protection against loss, for your family to have income after you were gone, etc; some of those features are now included for free 💲

• Some annuities are built to grow your savings; others are built to maximize your retirement income 📈 💰
  Not all annuities will offer all of these advantages; but the annuity marketplace is a varied beast, with much to offer in either of these arenas.

• You cannot lose the value you have built in your annuity; you are completely protected against loss
  Variable annuities are the exception to this rule, although you can pay extra fees for protection against loss 📉
  I think this is the 2nd most attractive feature of annuities; a volatile stock market makes me want an investment vehicle where I can grow with the market, but am protected against loss 😊

• You could also leave a legacy to your family with an annuity 👨‍👩‍👦‍👦
  This takes planning; speak with your consultant about how to structure this.

• Annuities are tax-advantaged, and have no IRS contribution limits 💵

But aren’t annuities terrible? I heard that somewhere… from someone…❔

Kind of like black cats and anti-heroes, annuities are sometimes misunderstood. Let’s dispel some of the myths about annuities you may have heard:

• Annuities are sold on commission, so anyone who tries to sell you an annuity doesn’t care about you and just wants to make a commission, so they’ll sell you an inappropriate product.
  Does that sound silly to everyone else, too? Any number of services are sold on a commission basis- your realtor, mortgage broker, auto/home insurance agent, travel agent, nearly all types of sales roles- and it is beyond ludicrous to assign “lack of integrity” to everyone in those industries 😡
  Side note, ethics is a personal thing; there are extremely ethical Sandwich Artists at Snarf’s, and extremely unethical financial advisors with a legal “fiduciary duty” to do their best for their clients. The government will never be able to regulate people into being good; you must use your judgment and only work with people you like, know, and trust 😊

• Annuities charge expensive surrender fees 💲
  Here’s the argument: If you put your money into an annuity, and truly need the money back within a few years, you have to pay a surrender fee if you’re within the surrender period. A typical surrender period is 5-7 years, with a surrender fee of 7-10% of your withdrawal amount.
  This is all true; but the argument always struck me as odd. If you withdraw money too early from any qualified retirement plan like a 401(k), you’ll pay income tax and a 10% penalty on your withdrawal. Moreover, that period lasts until you’re 59 1/2, not just 5-7 years from creating the account. That argument always made me shake my head, even before I went into the finance industry myself 🙄

• Annuities are only for older people, close to retirement 👴 👵
  Au contraire, my friend! I think that used to be true, when interest rates were so high in the 80s, or when the stock market was thriving & had low volatility over the last 10 years. At those times, it probably did make more sense to use other investment vehicles. (Personally, I think protection from loss make annuities somewhat appropriate for anyone, at any age, who has money they can’t afford to lose- as long as the fees are low, of course)
  As far as age is concerned- I, myself, have an annuity, and I am under 40. I am perfectly happy with its performance, and I’m paying fewer fees than I paid my former financial advisor ❕

Talk to your money person to see if an annuity will work for you; and get a 2nd opinion too. Some money people don’t make a lot of commission from annuities, so they don’t know them as well as other people who specialize in annuities. Honestly- get a 2nd opinion- your future is worth it 👍👍

That’s more like it! Annuities can be an appropriate investment for you, offering great value like protecting you from running out of money before you kick the bucket; passing on a legacy; offering a safe investment vehicle; and more 😁

Now That’s Smart Money 🧐