Hate Annuities? You’re Not Alone


By Jason LaBarge
Managing Partner, Premier Planning Group

Pensions sound great! Work for a company for 20 or 30 years, contribute to its defined benefit pension plan, and receive guaranteed monthly income during your retirement. This financial peace of mind in retirement is what some people dream about! Unfortunately, with more and more companies no longer offering a pension, retirees need to find other guaranteed income.

Pensions used to be prevalent. According to the Center for Retirement Research at Boston College, at one time, 88 percent of private sector workers who had a workplace retirement plan had a pension. The center estimated that only 33 percent have a pension now. By other accounts, the discrepancy between full-time federal, state and local government employees with a defined benefit pension plan and those in the private sector is even larger at 87 percent and 19 percent, respectively.

I often talk about PAYchecks and PLAYchecks when planning for retirement; the PAYchecks should cover your necessities each month: housing, food, clothing, etc. Your PLAYchecks cover everything else. It’s our practice to try and find guaranteed sources of income to be your PAYchecks in retirement, but if you don’t have a pension, or your pension doesn’t pay enough to cover everything, how do you do that? I propose you consider an annuity.

I can hear what you’re likely thinking right now, “I hate annuities!” Annuities take a lot of heat, and I’ve had my own clients tell me they “hate annuities, but love that American Equity thing.” That “American Equity thing” they mentioned is an annuity! Many people spout these types of statements without considering what an annuity really is, and they are usually unaware that there are more than 15 types of annuities, each providing its own unique benefits. To say you hate all annuities would be as broad a statement as saying you hate all mutual funds, so if you fall into the “I hate annuities” camp, read on and keep an open mind. Annuities aren’t for everyone, but you may be surprised in how useful a tool they can be when planning for consistent retirement income similar to a pension.

Why People Love Annuities - Two Broad Benefits

  1. Guaranteed income for life. With more pensions going away, it is becoming increasingly important for retirees to find their own sources of lifetime income. You can think about shifting longevity risks to an insurance company as similar to shifting your home, car or life’s protection to an insurance company in the form of auto, home and life insurance.
  2. Annuities provide for tax-deferred growth of non-IRA money. IRAs already have this benefit, but using non-IRA money in annuities provide the same tax-deferred growth, which means any investment growth you enjoy is not immediately subject to taxes, but will be taxed later instead.

An annuity can provide probate avoidance, because you decide your beneficiaries when you first buy your annuity.

Why Annuities Aren’t for Everyone

Although annuities can be an effective tool in planning for your retirement, there are some things you need to consider and plan for if you are going to have an annuity as a part of your portfolio.

The biggest issue is liquidity. Most annuities that offer the benefit of lifetime income come with the stipulation that you give up liquidity for a certain period of time. It could range from seven years to 10 years, so when considering an annuity, look at all your options and make sure you understand these limitations before you buy. Your financial professional should clearly state all limitations before purchasing any financial product.

Maintaining the proper liquidity amount outside the annuity is critical; you want to have enough available to you in non-annuity funds to avoid any early withdrawal penalties and that withdrawals will not decrease your future monthly payments so much that you can no longer cover your necessities.

To summarize this point, I advise that you never have all your eggs in just one basket, and the same applies for annuities. Annuities are just one tool to consider when creating your retirement plan, since they can certainly come in handy when paired with a pension and your Social Security benefits to create a dependable monthly PAYcheck in retirement that will cover your monthly budget needs.

What to Consider When Looking to Purchase an Annuity

There are two main types of annuities: immediate and deferred.

An immediate annuity or what is known as a SPIA, single premium immediate annuity, is where you give an insurance company a lump sum and they turn around and provide you a monthly payment right away. This will usually continue for the lifetime of you and/or your spouse. Most immediate annuities are annuitized, which means that in exchange for this immediate, regular, guaranteed income, you no longer have access to the money.

Deferred annuities are just what they sound like. In contrast to the immediate annuity, a deferred annuity will wait to pay you an income. Your money continues to grow in the meantime and you can often lock in guaranteed growth. Not all deferred annuities require you to annuitize the money.

There are two sub-categories: fixed and variable.

A fixed annuity pays a fixed rate, much like a CD. There is also a fixed index annuity, which pays a rate of return based upon the movement of some market index, but it also has a guaranteed no-loss provision.

With variable annuities, you have a mutual fund inside of an annuity wrapper where, theoretically, returns are higher than a fixed or a fixed index annuity. You need to remember, though, that you can lose money based on market losses. The insurance companies offering these types of annuities often charge a fee for their guarantee, known as the M&E, or mortality and expense fee, which fixed and fixed index annuities do not charge. Your financial professional should explain all fees to you before purchasing any financial product.

How to Choose the Annuity that is Right for You

If you have decided that an annuity would be a useful tool to have as a part of your retirement plan, you need to decide which annuity product is best for you. Because of the guarantees most annuities provide, you can work backward to determine how much you will need to put into an annuity to give you the payments you require. If you know how long you’re going to defer taking payments, and you know what the interest rate is, you should be able to determine how much you need to allocate into the annuity to provide the monthly payment you need. You can find helpful calculators by Googling “annuity calculator” to give you a rough idea of what you can expect.

In addition to your own research, I recommend you speak to your trusted financial professional to help you determine what is best for your situation after considering your financial needs, life circumstances and retirement goals. They can explain, in understandable terms, what you are agreeing to, how the annuity works, and any related fees you can expect.

Annuities get a bad rap. So many people say they hate annuities, but I have yet to find a client who doesn’t like to know what exactly they can expect each month in income and to have that amount guaranteed for life. That’s why people like the idea of pensions so much. The funny thing is, to provide security and relieve companies of long-term financial obligations, some companies are transferring their pension plans into pension annuities! So, if your employer doesn’t offer a pension plan, don’t despair, you can create your own pension-like income stream by purchasing an annuity that is right for you.

Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review the annuity product for its features, costs, risks and how the variables associated with the benefits reference are calculated.

Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Summit Brokerage Services Inc nor any of its representatives may give legal or tax advice.

Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC. The firm is located at 115 West Street, Suite 400, in Annapolis.


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