Much has been written and discussed about the evils of annuities. In fact, I am frequently asked about annuities by clients and future clients. Of course, like so many things, an annuity is neither inherently good nor bad. In fact, the only relevant question is: Is an annuity good for YOU?In turn, the answer to that question depends on things like whether or not you need income in retirement, your level of tolerance for stock market volatility, the size of your retirement nest egg, and whether or not you wish to leave a legacy for your heirs.
Pensions are not as prevalent as they once were. Most people cannot live on social security alone. Everyone needs to assess their expenses in retirement to see if they will have enough income to live the lifestyle they wish. If you do not have enough, there are annuities specifically designed to provide income to you. Due to increased life expectancy, a lifelong paycheck may be desired by some.
YOUR CURRENT NEST EGG
If you are a person who is 65 years old, has put away $4 million, and you need to draw $100,000 per year from your account, you can live to be 100 and likely will never need an annuity for income (even with inflation and a conservative return). In this case you may not need an annuity, although you may want one for other reasons. For example, you may want to leave a legacy or provide estate tax coverage for your heirs in the form of the life insurance feature in the annuity, or you may want to grow your wealth on a tax-deferred basis.
THE STOCK MARKET MAKES YOU NERVOUS
If you don’t like the downside risk of the stock market, but you want a chance to benefit from the upside of returns in the market, you may want to invest into a variable annuity that offers such downside protection. Keep in mind, however, that in this type of annuity you will NOT get the full upside of the market, as downside risk is the focus.
There are many things to be cautious about when considering annuities as part of your overall plan such as:
- You most likely should NOT be asked to put all of your assets into an annuity. If this happens, get a second opinion. You may need to keep some of your funds liquid in case you need to use them. Remember, certain annuities are not readily available without a cost.
- Understand that you pay for the annuity features. You pay a commission for the features and you should evaluate if the cost is worth meeting your needs.
- Be sure to utilize a highly rated insurance company for the annuity. You are relying on the company to be able to make the payments to you for the desired period, which may be for the remainder of your life.
THE BOTTOM LINE
Annuities are not for everybody, and should only be recommended after a careful and full discussion regarding your needs. Remember, no two financial plans are alike. Assess your personal financial situation, then give us a call to analyze all of your financial and retirement planning options.
by Ronald Donato, Jr., CFP®, MBA
Director of Financial Services