Money Matters: The True Story on Annuities

Story by “Coach Pete” D’Arruda president of Capital Financial Planning and host of Financial Safari Radio broadcast from Cary, NC. Photo by Glenn Stevens.

Cary, NC- Let’s face it: Market volatility is here to stay. We’re still recovering from the recession, and every day the market seems more and more unpredictable. This type of environment makes retirement planning quite difficult. Here are some thoughts on the issue of annuities.

Volatility is the New Norm

Knowing that volatility is the new norm is half the battle. The other half of the battle is knowing how to plan around it so you can maintain your plan for retirement.

For many soon-to-be retirees, the answer involves an annuity, a versatile financial tool that helps supplement income needs in retirement.

Annuities Have a Negative Perception

Despite their benefits, annuities have received negative attention over the years for a number of reasons, including rival products seeking to discredit them, poorly constructed products in the space and inappropriate sales of the products. It is imperative potential annuity investors have all the right information on hand to make an informed decision.

While annuities are not for everyone, those who can benefit from them should not let common misconceptions dissuade them from using annuities as part of a comprehensive financial plan.

The Top 5 Rumors About Annuities

1. Every issued annuity is a variable annuity.

Despite what you may have heard, there are several types of annuities: fixed, immediate and variable.

• A fixed annuity locks in a fixed interest rate by which the principal will grow each year.
• An immediate annuity, which is terminated upon death of the purchaser, pays a guaranteed income almost immediately after it is purchased.
• A variable annuity’s payout depends on the stock market’s performance, as a variable annuity is normally invested in equities. However, a minimum payment is typically guaranteed with a variable annuity.

A fixed index annuity is safe from market slides and lets the holder share in some of the upside of the market on up years. The advantage of this type of annuity is the peace of mind knowing the worst return possible is only zero, not negative. Roughly five years ago, the ability to add a future income attachment called a “rider” to your contract has enabled policyholders to get contractually guaranteed growth each year of between four and seven percent depending on the product and company for a nominal fee. This approach takes the worry out of knowing what your income will be in retirement and enables the policyholder to take more risk with other money, if desired.

2.The impact of inflation is too great for fixed annuities.

Inflation poses a real threat to any investor trying to preserve their assets. Fortunately there are strategies designed within fixed annuities to combat against inflation. Fixed annuities that provide long-term planning with guaranteed interest rates outweigh any risk taken to maximize future savings.

Risk is a huge obstacle for investors. Annuities are a great vehicle for eliminating the type of risk investors take in the stock market.

3.  With penalties and surrender charges, annuities are just too expensive.

This rumor is partly true – certain annuities come with surrender charges, which can make them undesirable for some retirees. However, they’re designed that way; annuities are meant to provide long-term security. They are not something investors should expect to jump in and out of.

When looking at annuities, remember that the long-term security benefits compensate the initial annuity expenses. There are many annuities with vanishing surrender penalties and if held for five to ten years (depending on the particular contract) the policyholder can remove all their money from the plan penalty free.

4. Never use your IRA money to invest in an annuity.

You know the old phrase, “never say never.” There are some exceptions to this rule.

For example, if an annuity offers a better return than an IRA, it may be in the investor’s best interest to consider an annuity. If it offers more safety than your mutual funds, it may also be a time to explore your annuity options.

5. With a big name comes a better return.

Bigger companies do not guarantee better opportunities or services – think of Lehman Brothers or Bear Stearns.

There is an entire universe of annuity offerings from different insurance companies. Seek the opinion of at least two registered investment advisors who will introduce you to that universe and offer objective advice on the annuity that might work best within your comprehensive financial plan. A trusted and well-informed registered investment advisor should develop a plan that includes putting some of your money in a safe place where it will grow at a guaranteed rate until retirement.

Do Your Research

Remember that securing guaranteed retirement income in this volatile, low-rate environment is difficult – but not impossible. Do your research, tune out the conflicting opinions and don’t be afraid to ask the tough questions of your financial planner. It’s absolutely possible an annuity should be part of your financial plan.  Get your hands on an Annuity Owner’s Manual before purchasing an annuity and learn the good, the bad, and the fine print before you ever invest your money.

For more information on navigating annuities visit http://www.annuitysoup.com/.

Related

• Money Matters series on CaryCitizen

Pete D’Arruda hosts the nationally syndicated radio program Financial Safari and is president of Capital Financial Advisory Group, LLC in Cary, North Carolina. In our area, Pete can be heard on WRDU106.1FM Sunday afternoons from 3 to 5 pm.

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