This month’s topic, annuities, is one on which there exist different opinions. Complex, with many “moving parts,” annuities are sometimes misunderstood.
There are financial authors who consider an annuity’s cost so prohibitive they disregard them out of hand. This is an example of where you have to make your own decision after you hear some facts. Because for many investors, especially for those who value the benefits offered, the costs are an acceptable price to pay.
Why the disagreement? Cost versus benefits. But with pensions a thing of the past for many, annuities have become more popular with investors. Annuities are not new. In fact, these instruments have been in use since Roman times.
The complete variety and full details of annuities can’t be included here. But here’s an overview.
What is an annuity? – An annuity is an insurance instrument that can pay a stream of income and can be used like a personal pension. That income stream may be used as part of one’s retirement strategy.
Annuity types - There are many types of annuities. But for our purposes we are discussing two types of annuities: deferred and immediate. An immediate annuity begins payouts immediately. With a deferred annuity, one chooses to defer income to take advantage of a time of potential growth, called an accumulation period.
Advantages of an annuity - 1.) deposits, or investments, placed in an annuity grow tax deferred. While money is in the annuity you do not pay tax on the earnings. 2.) Life-time payment. Insurance companies guarantee through an annuity contract, a certain payout, or percentage, for the life of the account owner. This lifetime payout can sometimes also include the account owner’s spouse. 3.) Many deferred annuities allow you to invest in the stock market. And they offer – for additional costs - guarantees that you will not lose your investment through stock market volatility.
Disadvantages – 1.) Cost- annuities can have costs that are double, or more, of a standard mutual-fund investment. 2.) Locked-up assets- money that you deposit into a deferred annuity generally has a surrender charge for the first eight, or so, years. You can receive a standard payout as a percentage, but if you remove money deposited as a lump sum, there may be deferred back-end charges.
So, chickadee, are annuities right for you? Only you can make that decision. Talk to a trusted advisor and think about what suits your needs and specific circumstance. You know better than a person writing a finance column what might be a good option for your needs.
Disclosure: Only securities and advisory services offered through Wall Street Financial Group, Inc. Registered Investment Advisor. Member FINRA/SIPC. Wall Street Financial Group, Inc. and Norumbega Financial are separate entities, independently owned and operated. Variable annuities may be subject to risk, including the possible loss of principal.