Sound familiar? Okay—maybe the last one doesn’t, but the theme fits. Annuities have been the poster child of bad investments for years. Critics point to high fees, insurance companies running off in the night with your money, and your nest egg is placed in a keyless safe. There are certain circumstances where these accusations are valid. But, for the most part…they’re not. More importantly, missing out on using annuities to guarantee your retirement’s safety could be a missed opportunity.
It’s time to tackle why so many people have reservations about them. The first thing you’ll usually hear people bring up is that the fees built into annuity products are ridiculous—and for some products, that’s true. What most don’t realize is that fee criticisms generally apply to variable annuities, which often force you to pay annual 3-4% fees while also having similar volatility to an account in the market. So, your account might lose money….and you’re still on the hook for paying those fees! Some variable annuities have “too good to be true” illustrations—and often they really are too good to be true. Opting for fixed or fixed indexed products that produce a guaranteed return—albeit somewhat lower than “theoretical” variable ones—is a smart way for any retiree to guarantee the safety of principal while allowing growth for future years.
Secondly, many will say that insurance companies have the right to run off with your cash once you pass away. This is also a misconception. Some contracts are set up in a way that if you pass away, you forfeit those funds. These often have higher commission rates for your advisor and can leave your family feeling frustrated that your retirement money is gone in the blink of an eye.
However, many products exist that do allow you to leave funds to your spouse or other beneficiaries. You can usually have a guaranteed income in a few years assuming you’re still around to see them, or if you pass away, it can be passed to whoever you’ve designated. You’ve just got to find an advisor willing to put your financial needs before those of his own paycheck.
Lastly, let’s tackle the most feared word that crops up in annuity discussions: surrender charges. Most clients I’ve met with immediately worry they’re surrendering their money and won’t see a penny of it again. Instead, what this word means is that if you choose to end the contract early, the insurance company does have a right to the portion of the principal.
For example, you put $100,000 into a 10-year annuity, and in year 1, you want all of it back. The annuity company can’t simply give you all of that original amount back—you’ve broken your half of the deal, and they have rules that apply when this occurs. I always stress that an annuity is a long-term product for down the road. An advisor who tries to tell you that there isn’t any penalty for going back on a contract isn’t telling you the truth.
The real solution to these misconceptions is that you’ve got to make sure you’re working with an advisor that has your best interests at heart. An annuity isn’t something you dump your entire portfolio into, and it’s not going to meet everyone’s financial goals. But it absolutely will meet the needs of others who just need to guarantee long-term income for their later years and have other funds to meet current needs.