Annuities Can Be Safe, Smart Choices for Wealth Protection

 

Annuities Can Be Safe, Smart Choices for Wealth Protection

While a properly structured and optimized whole life policy should always be cornerstone of every solid financial plan, there are those who wish to add another popular safe money product to their portfolio-the annuity.

Baby boomers nearing retirement, having seen huge chunks of their life savings drained away during the current recession, have driven annuity sales to all time highs in their bid to find safe havens for their wealth.

Annuities are also becoming more popular with younger people, especially those who have inherited money and seek tax benefits or wish to avoid putting money in the stock market or otherwise expose their money to risk.

These younger "pre-retirees" also share a concern with their Boomer counterparts: the well-founded fear of outliving their money.

A recent survey done by Boston Research Group found that the majority of respondents admitted to having a gaping hole in their financial plans, namely the lack of an income stream in retirement.

As pensions disappear, along with wrist watches and payphones, there is a real possibility that most people will lack income streams to support themselves in the latter phases of their lives.

Using a variety of structured payouts, annuities have a unique advantage over other investments, creating a safe, steady source of income that you can't outlive.

Coupled with a properly designed Bank on Yourself policy or policies, annuities can give you a lot more peace of mind about your financial future.

What are annuities exactly and how do they work?

Simply defined, an annuity is an insurance product designed to pay out income over a period of time.

Typically, you agree to make a series of payments or one lump sum payment to an annuity issuer.

In consideration for those payments, the company agrees to make periodic payments to you for a definite time period or an indefinite period (until death) in one of two ways:

Deferred annuities allow you to pay either monthly installments or lump sum payments This account grows on a tax-deferred basis until you start receiving payments at a later date.  While the tax deferred status of these annuities is often touted as a desirable benefit, there are potentially adverse tax consequences later on of which you need to be aware.

In contrast, an immediate annuity begins paying benefits the same year as when you deposit your money. Payment amounts vary based on factors such as age, gender, and total amount invested.

What are the types of annuities and which one is best?

Some companies like to market annuity products which feature various whistles, bells, and options designed to convince consumers to choose that company's offerings over those of another.

Some of these options are designed to address certain inherent issues while others are simply marketing devices which add to the perception of value, but do little to truly improve the product. It's important to understand the features of any annuity at which you are looking and determine whether or not that feature is a true improvement.

Customization aside, there are essentially only three real types of annuities:

Variable annuities allow the buyer to choose how their account is invested from a variety of options, including mutual funds.  This type of annuity's rate of return is by necessity tied to the performance of the investment options a person selects, as well as the amount of deposits made.

Some people choose this kind of annuity because of  its' supposedly greater growth potential.  However, you could wind up with a lot smaller payments should the stock market falter.  Variable annuities carry with them the additional burden of not being able to forecast with any degree of certainty how much money you will get when the time comes to receive payments.

With a fixed annuity, the annuity company contracts with the purchaser to pay no less than an agreed-upon interest rate while the account is growing; and the purchaser agrees to make periodic payments of specified amounts.

Indexed annuities provide investment returns based on fluctuations in a particular index, such as the S&P 500.  Unlike variable annuities, indexed annuity contracts stipulate a minimum contract value, regardless of the performance of the index.  These are often referred to as "guarantees."

The type of annuity I recommend to my clients is an indexed annuity customized with guaranteed income riders.  This product addresses concerns about both the erosion of wealth due to inflation and the need for predictable, guaranteed income in retirement.

Fees and expenses

Just like other types of financial options, annuities have fees associated with them.

While most of these fees and commission are legitimate, it is worthwhile to train yourself to look carefully at them to determine the impact to your future wealth.

Arguably, the fee to which you should pay the most attention and which has the most potential to damage your net worth is the surrender charge.  A surrender charge is the annuity company's version of an early withdrawal penalty.

Since you never know when some unexpected life challenge will require you to access your money, it is vital that you know EXACTLY how much the surrender charge will be and how long the surrender period is.

Commissions are another factor when assessing the true cost of your annuity. Sales people are sometimes given commissions as high as 10 percent for the initial investment, plus they receive ongoing commissions as the account is growing.

Depending on the type of annuity, you could also be charged an annual fee or fees. These fees could add as much as an additional 2% a year to the cost of your annuity.

When comparing annuities, be sure to take a cold, hard look at the associated fees and have your advisor do some serious number-crunching for you.

When considering an annuity purchase, you should note the various expenses so you have a good understanding of exactly how much this annuity is costing you. Insist on your financial advisor doing the same.

Other things of which you should be aware

To conclude:

More and more financial advisors are beginning to agree that an annuity which is properly designed and implemented  can be a great way to diversify your portfolio and create a steady stream of money that you won't outlive.

To learn more about safe money strategies that make sense for you, Google "Living Wealthy Radio" or "Living Wealthy Financial."  You'll discover dozens of useful articles, podcasts, and videos to help you learn more about how to create a safe, secure stream of income you can never outlive.