Free Retirement Classes. What You Need To Know To Retire Successfully
What are annuities?
Types of Annuities
Annuities Fees & Expenses
Annuity Terms Glossary
Taxation Of Annuities
Pros & Cons of Annuities
State Annuity Guaranty
Questions about long-term care?
When most people think of long–term care for the elderly, they think of nursing homes. But it can involve much more than that.
Common objections to annuities
As we mentioned in previous sections, there is no perfect investment and you must know the characteristics of many investments in order construct the ideal portfolio. This is where financial education comes into play. Unfortunately, many people do not have the expertise in annuities we have and don’t understand annuities. They are quick to point out the fees and expenses of variable annuities, but do not point out the benefits of safety of principal, lifetime income and tax deferral. Regarding other investment advisors, a small number may have their own agenda and want to direct you away from a particular investment in order to win you as a money management client. Here are some common objections to annuities and counter points to consider.
“Annuities are too complicated to understand.”
At first glance, sure, annuities can appear confusing, especially with so many different types available and numerous personalization options. Put simply, an annuity is a contract you purchase from an insurance company. Then, depending on the type of annuity you buy, you receive certain crediting options that compound interest, tax-deferred, until withdrawn. When you’re ready to collect income, an annuity offers a variety of guaranteed payout options through a process known as “annuitization.” An insurance professional can explain it all to you in more detail.
I can make more money in the stock market.
Agreed, however would you use a driver on the putting green? Or a drill to cut a piece of plywood? The point being, use the appropriate tool for the job. Stocks are used for growth, not to protect your principal from losses, provide guaranteed income or defer taxes. Annuities have features that equites do not have and visa versa.
I prefer buying individual bonds and constructing a bond ladder with various maturities.
Buying individual bonds and holding them to maturity has its pros and cons. The advantages are: Buying bonds is relatively inexpensive if you it yourself, you can sell the individual bonds on the secondary market if you need the cash and you have control over what bonds you buy.
The disadvantage of using a bond ladder to generate consistent income in retirement are:
- Limited inventory – You may not be able to find enough different bonds to generate enough income each month or quarter.
- Hard to generate adequate yield in our current global low-yield environment.
- Bonds may be called.
- Time consuming – Each time a bond matures, you must replace it and go through the process again.
- Difference in the Bid/Ask spread may result in buying bonds less favorable than the price institutional investors purchase bonds.
- The amount of capital required to generate the amount of income you will need is typically much more than the amount of capital required to purchase an annuity that produces the same income.
I don’t want to tie up a lot of money in an illiquid annuity.
As mentioned in the Pros and Cons section, there is no perfect investment. Therefore you must find the ideal balance of multiple investment to construct the optimal portfolio. We typically use annuities to fill the gap between your desired monthly expenses in retirement and the income other sources provide. The amount of income required determines the size of the annuity. There are suitability requirements and insurance companies typically will only approve 50% of your investments be in annuities.
Annuity owners have investments other than annuities such as stocks, mutual funds and ETFs that provide growth and liquidity.
I’m afraid the insurance company may go bankrupt.
The income from the annuity is guaranteed by the paying claims ability of the insurance company, not a bank or federal government. With this being said, the risk of an insurance company not paying its obligations is an extremely low risk. Insurance companies are required to have a certain percentage of cash available to pay claims, if an insurance gets into financial trouble, typically another insurance company will purchase that book of business and if there is not buyer, each state insures up to $250,000 for a particular company.
I hear that annuities are bad and not to buy them. My attorney/advisor/accountant/co-worker/friend/family member…told me not to buy an annuity. I did a Google search and read or saw a video where they listed all of the reason not to buy an annuity.
If the perfect investment existed, it would have the following characteristics:
- Unlimited growth
- Provide an income stream for life
- 100% liquid
- Minimal risk
- No fees or expenses
Annuities grow tax-deferred and are generally designed to protect principal and provide income for life over one or two lives in retirement. In golfing terms, annuities are putters and equities are drivers. Saying that annuities are bad is like saying this putter is bad because you can’t drive the ball 100 yards down the fairway. Equities, bonds, cash, real estate and annuities all have their strengths and weaknesses. Instead of taking the word of others who are not experts on annuities, take the time to understand the characteristics of annuities so that you will be able to compare and contrast annuities to other investments and make an educated decision.
Call 301-588-0514 to get more information on annuities. We are happy to answer your questions and provide quotes.
For over 20 years, Jim Musgrave has been serving families and businesses as their financial advisor. Let us put our money management expertise to work for you. Set up a no obligation consultation by either filling out our contact form or by calling us at 301-588-0514. We are here for you!
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