I bet you have seen some cool marketing about great “guaranteed income” retirement products. Conversely, I will also suppose that you have seen a few marketing messages that talk about annuities being the spawn of the devil and that nobody should ever own an annuity.
Regular readers of this blog will not be surprised when I say that both of those messages are not what they seem. I strongly believe that there is no one correct solution for any problem. Every family’s retirement situation is unique. There may be instances when annuities could be a great solution for some of your money for a certain period of time. Other times, annuities may create more problems than they solve.
How does an annuity work?
- An annuity is a contract with an insurance company. The details of the contract matter, so make sure you read the fine print.
- Some annuities are designed to have seemingly cool features that sound great but can be very confusing to understand. Always seek some independent advice to be sure you understand what you are buying.
- You are paying the insurance company a fixed amount of money in exchange for a contractual promise to send you checks in the future. Once you buy the contract, your money is gone and all you have is the promise of the future payments. That’s why the quality and track record of the annuity company matters.
- In order for the annuity company to stay in business, they need to generate more income from the annuity premium payments in than they spend on the annuity benefit payments out. Remember, this is a business for them.
- If you live longer than average, you will receive more money from the annuity company than average. The longer you live the better the deal for you. And vice versa: If you die prematurely, often you receive benefits that are less than the premiums you paid.
- Generally, these things are true:
- Over a typical 10-year period, stocks have created more total return than bonds.
- Annuities benefit payments are based on bond returns.
Is an annuity a good investment?
You may want to consider annuities if the following are true:
- You do not want to leave money to your kids, grandkids or charities.
- You are really worried about covering your basic retirement living expenses. If you feel stress and anxiety about where the retirement income will come from, you might want the security of a contractual guarantee found in an annuity.
- You are healthy and you come from a long-lived family. If you live longer than most people your age, you get more from an annuity.
Some other points to consider when deciding whether annuities are right for your situation:
- You will likely be retired a long time, as long as 50 years. Therefore, some of your money will need to grow to keep ahead of inflation over the long term.
- The first 10 years of retirement can be a big adjustment and can set the tone for the remainder of your retired life. Purchasing a guarantee for a portion of that transition period can be helpful for some people.
- Assume that you will monitor your retirement game plan and adjust as needed. You may find the need to become more conservative in response to your specific life events, or you might be fortunate and choose to become more aggressive to take advantage of opportunities. These adjustments might call for adding or removing an annuity over the course of your retirement.
Getting good investment advice
Many times, the most interesting and exciting message you see about annuities—or any investment vehicle for that matter—will be an advertisement for some product. Remember that the advertisement costs money to produce and costs money to put in front of you. If you see the cool message a lot, somebody is spending a lot of money to get the word out. This spending only makes sense if they have a reasonable expectation of more money coming into their company from profits they make on the product than they are spending on the ads.
So what big ads are really telling you is that the product is pretty profitable for the manufacturer. This does not necessarily mean that it’s bad for the customer. But it absolutely means that it’s good for the manufacturer. The burden is then on the buyer to really understand what they get for their money.
Maybe I sound like a broken record, but this is an outstanding place for a CERTIFIED FINANCIAL PLANNER™ professional, fee-only, fiduciary financial advisor. CFP® professionals receive holistic financial planning training, have the fiduciary commitment to be a client advocate at all times, and have a fee-only structure. Therefore, you know you are working with somebody who is trained to understand annuities, committed to your best interests and only paid by you.
Having said all this, you should be skeptical of annuities. But you should also understand their benefits.
As I said above, every family situation is unique. If you want help understanding how an annuity could help you reach your retirement goals, you might want the help of a CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.