Annuities: Sound Investment or Suckers Bet?

One long standing retirement option is to purchase an annuity.  Before we delve into the details of annuities we would like to mention that in all likelihood you already have an annuity and it is called Social Security.

The only difference between a standard annuity and Social Security is the method of funding the account. In its simplest form an annuity is paid for with a lump sum payment while Social Security is funded over time through paycheck deductions. The end result is the same, a guaranteed monthly payment for life.

Since you already have an annuity via Social Security, in the interest of diversity, investing in additional annuities would represent an overly conservative unbalanced portfolio and not the best use of your retirement funds.

When considering an annuity purchase there are multiple important factors to evaluate. You need to know what you are purchasing and you need to know the pitfalls or benefits of such a purchase.

• Very complicated product
• High commission product
• Spousal benefit
• Indexed to inflation

Aunties are a contractual agreement between you and an insurance company. You purchase an annuity and the insurance company agrees to provide you with a monthly payout. This relationship can be very simple or incredibly complicated depending on the type of annuity your purchase.

There are numerous variations of annuities but basically you have 4 types: Immediate Annuities, Deferred Income Annuities, Fixed Annuities, and Variable Annuities.

The Immediate Annuity is what most people think an annuity is, you pay a lump sum and in exchange the insurance company provides you with a fixed monthly payment. If you purchase an annuity with a spousal benefit and / or one indexed to inflation, either or both of these options will reduce your monthly payout amount.

The Deferred Income Annuity is like an immediate annuity but protects against longevity risk by postponing the start of payments you. Your annuity contract will specify the age when you will begin receiving payments.

Fixed annuities are most similar to deferred income annuities however they offer the option of when you chose to start receiving payouts. Difficulty accessing your funds, possible penalties, tax consequences and surrender charges make this option incredibly complicated – BUYER BEWARE and you should never enter into this type of contract without proper legal assistance.

Variable annuities, similar to fixed annuities, offer some attractive options but they also have similar pitfalls. It goes beyond the scope of this article to list all the variables, suffice it to say the same warning applies to variable annuities – BUYER BEWARE.

Anytime you consider an annuity purchase, when meeting with your sales rep, PLEASE realize the guy on the other side of the table’s primary motivation is HIS personal commission, which on an annuity contract is huge.

Remember the insurance company is similar to Las Vegas in that the house always has an advantage and the odds are stacked in their favor. Since Social Security is an annuity you would be better served to diversify your retirement account with other investment vehicles (stocks, bonds…) as opposed to an annuity purchase. We can help you with this.