If you are like me, you see plenty of commercials for annuities. Annuities are built by life insurance companies and one of the things that insurance companies have gotten great at since they stared in about 1760 is marketing. They create cool products and tell really cool stories about how they can make your retirement great.
But these products are complicated. The don’t ALWAYS make your retirement great. What should you know about annuities?
- They are contracts between you and an insurance company. The insurance company has more lawyers than you, so it’s wise to be careful to understand exactly what you are buying.
- They can be expensive. Like many things, you can pay a lot to own an annuity. This is the classic criticism of annuities. In the last 10 years, annuities have become much cheaper to own. The trend toward no-load investment products and toward fee-only fiduciary financial planners, like me, are two reasons for the lower costs.
- It’s one way to get a guaranteed outcome. Very few products in the investment world are guaranteed. Stocks and bonds have long track records, and if you own them long enough, history suggests that you will make money. But . . . there is no guarantee. With an annuity, it’s a contract and you CAN choose to pay for a guaranteed outcome. That can be fine. Think about your granddad’s pension, that was an annuity contract. He had a predictable retirement income.
- You can get guaranteed income, or sometimes, growth as well. Many annuities allow you to own buckets stocks that can provide growth over time. The annuity wrapper allows the investments to grow without any taxes due until you begin to remove money from the contract.
- Income annuities are the plain vanilla choice. You purchase the contract and in exchange you get a fixed payout at set intervals for a specific length of time. You can choose to have the income begin right way with an immediate annuity. You can also choose to start the income later with a deferred income annuity. You can choose to have income for a set period or for as long as you live with a lifetime income
One of the great things about lifetime income annuities, is that they can serve as excellent insurance against living longer than you expected. Today, most retirees will live at least 10 years longer than they expect. In that case, a lifetime annuity can come in real handy. - Variable annuities own buckets of investments like stocks and bonds that can grow faster than inflation and stay protected form taxes inside the annuity wrapper. Many of these contracts offer contractual options to guarantee account values or to provide guaranteed income. These options all cost money. Sometimes the benefit still outweighs the cost. It’s worth a careful assessment with the help of a fiduciary financial planner.
- Income annuities are the plain vanilla choice. You purchase the contract and in exchange you get a fixed payout at set intervals for a specific length of time. You can choose to have the income begin right way with an immediate annuity. You can also choose to start the income later with a deferred income annuity. You can choose to have income for a set period or for as long as you live with a lifetime income
- There are no government-imposed limits on how much you can put in a nonqualified annuity. Qualified retirement plans such as traditional IRAs, Roth IRAs and 401(k) plans have limits on the amount anyone can contribute annually. The law places no limits on the amount of nonqualified funds you can allocate to annuities.
- Sometimes annuities work well in an IRA or Roth IRA. Since annuities provide tax deferral, it may seem redundant to use them in a tax-deferred retirement plan. But an annuity be helpful in a retirement account by providing a fixed rate of return for part of your money. Also, some of the guaranteed income options can be particularly appealing when you place them inside a Roth IRA because the income will be tax free at distribution.
- You can use annuities to put off your Required IRA Distributions. You will need to use a qualified longevity annuity contract (QLAC). The money in a QLAC is excluded from required minimum distribution (RMDs) calculations
You probably know You must start taking from your IRA, 401(k) plan or other qualified retirement plan when you reach age 73. But QLAC funds do NOT need be distributed until age 85.
Yes, annuities are complex. Yes, they CAN be expensive. But they can ALSO add some GREAT features to your retirement income plan. If you wonder how an annuity would fit in your plans, maybe you should have a visit with an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor in West Saint Paul, Minnesota to help better understand your options. I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.
I am a financial planner who is an advocate for my clients ALL THE TIME – a fiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.
And yes, I’m still taking on a few great families to be part of my financial planning practice in West Saint Paul, Minnesota and, thanks to Zoom, across the country.
Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.