Broker Check

Annuities – Time to Replace Yours?

August 31, 2023

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?  Many of our clients have purchased annuities over the years.  Interest rates have increased significantly, and your goals/needs may have changed.  Since newer annuities have some attractive rates and features, it may be time to review whether or not your existing annuities are still accomplishing your goals. We will focus on income in this article; but all of your own goals must be considered.  However, if you are seeking to maximize income, many of the new features may dictate that you move your existing annuity to a newer version.

How the analysis works:

  • We will evaluate the features and annual costs of the existing annuities (you provide the most recent statement);
  • We discuss your current and anticipated financial needs to determine how to help achieve your goals;
  • We then find and analyze various options available to maximize your income, and/or growth, and or life insurance amount, depending on your goals;
  • We discuss with you the options and features, costs, etc., and then you let us know how you would like to proceed.

Here is an example of a recent income maximization goal met.

Terms used are Income Base (the amount upon which future income is based, which can be more or less than the market value), Market Value (the actual value of the annuity if you cashed it in today), Surrender Charges (the ‘penalty’ for cashing in an annuity early – usually last 7-10 years), Payout Percentage (the percentage of the Income Base that can get paid out each year) and expenses.

A client who will retire in 8-10 years has an existing annuity that has an Income Base value of $220,000.  Market Value is $187,000 after any surrender charges, and the annual expenses are 3%.  The current annuity grows the Income Base by 5% per year guaranteed, and the Payout Percentage is 5%.  This client needs to maximize income when she retires.  TO ROLL THIS INTO ANOTHER ANNUITY THE MARKET VALUE IS USED (i.e., you eliminate the income base from the old annuity).  We replaced this annuity with one that will provide:  10 annual income base increases of 12% each guaranteed (vs. 5%), only 1% annual expense (vs 3%), has new 7 year surrender charge schedule (the only negative), and offers Payout Percentage in 8 years of 6.2%.  Income difference projected to be $1,897/month new vs. $1,283/month old.  Both the old and new annuities are invested in the S&P index.  Given that it is highly unlikely that the S&P index will average over 12% per year over the next 10 years, this new solution works!

BOTTOM LINE:  Annuities are not for everyone, and should only be recommended after a full discussion regarding your needs.  Please give us a call to analyze your options.