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Annuities Are Bad
talessi@ariesfoundation.org
Actually it should be phrased "Are Annuities Bad"?
Annuities are bad, at least that's what everyone says...right?
Let's start with what an annuity is: An annuity is a series of payments made at equal intervals for a set period of time. What are examples of an annuity? Social Security is one. Pension Plans are another. Neither of these things sound bad, in fact, they sound pretty good to have in your retirement plan.
Then why do they have such a "bad" rap?
There are many different types of annuities available and all of them are issued by Insurance Companies, so depending on who is doing the "dissing" or promoting, you will get a biased view. And all annuities then get lumped into the same "bad" basket;
Deferred Income
- see above examples. You give your money to an insurance company who then promises to pay you out a monthly benefit for a set period of time.
Fixed
- Just like a CD. Interest is guaranteed for a set period and then is either rolled over to a new contract or liquidated just like at the bank.
Fixed Indexed
- Adding a component to the above (Fixed) that allows limited participation to a stock market index return without the downside exposure. Of course, the upside return is severely limited.
Variable
- money is invested in mutual funds or ETF (exchange traded funds). There are no upfront sales loads and the growth is tax-deferred.
(Author's Note: The tax deferral can be a positive or a negative depending on the situation. Where as
regular investments held for more than a year fall under Capital Gains, any distributions from
annuities are taxed as ordinary income, which can be problematic in our retirement years.
But I heard annuities were expensive?
It depends on the type you are using. Variable Annuities have a platform fee they call M&E (mortality and expense) that can be as high as 1.5%. Then add on the investment costs (usually .50% - 1.15% depending on the provider) and you are looking at north of 2% in fees. Toss on a rider or two and you could be looking at a whopping 3 - 4% in fees every year! Now you get where some of the bad rap is coming from.
But most of the other annuities have no fees, or costs, and come with guarantees; interest rate, set period of payments, etc...
So What Can an Annuity do?
Creat a lifetime income stream similar to Social Security or a Pension so that you can live comfortably in retirement knowing you will never outlive your money. They are now one of the only ways left (thanks to the SECURE ACT) to defer your RMD (erequired minimum distributions) so you can possibly pass them to the next generation.
So...Are Annuities Bad?
Yes: If you are trying to compare them to Equities or use strictly as an investment only tool.
No: When payouts are guaranteed and used as a planned income source.
Want to Learn More?
Check out our Youtube Channel: https://www.youtube.com/channel/UC8XA1to8IHXsqsrGfWfRaHA
On Wednesdays at 11:30
as we add our latest educational video and this week it's on Annuities
You can also visit our website:https://www.ariesfoundation.org
as well
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