Should Annuities Be A Part Of Your Financial Strategy?

There’s a lot of talk these days about annuities and whether they are good investments. As is true for most things when you’re talking about money, no answer is right for all people, all the time.

Annuities are popular with many investors. Last year alone, U.S. annuity sales topped $200 billion. Before you can determine if they are right for you, you should start with the basics and ask: what is an annuity? By definition, an annuity is a contract between two parties; the first is usually an insurance company and the second is an individual who agrees to pay a lump sum of money to that company, which in turn agrees to give regular payments to the individual for a length of time specified in the contract. For example, you might invest $100,000 in a 20-year annuity that guarantees 3% growth over the period of the annuity. Every month, the company would send you a check for $554.60 and at the end of that 20-year period, you and the company could both walk away from the agreement. In another scenario (one which is more common for retirement savings) what’s called a “life” annuity is guaranteed to pay a certain rate of return for the rest of your life.

Sounds pretty straightforward, right? While annuities can be a solid investment, as always, the devil is in the details. For example, you can choose between a fixed or variable annuity. If you go with the latter, at age 60 you might get a 5.2% return which jumps to 5.8% at age 70 and 7.2% when you hit 80. Because annuities are issued by an insurance company, under the current tax code, Congress allows them to grow tax-deferred

You also need to be aware there are fees associated with annuities that could severely impact how much money you could make from them. Often, investors are suckered into signing up for annuities that are laden with fees, which are almost guaranteed to underperform. They see dollar signs but miss the warning signs that unscrupulous sales people fail to point out.

Last year, Congress investigated allegations that some insurance firms put heavy pressure on consumers to buy indexed annuities, with returns tied to a stock market index. Those sales people allegedly even promised vacations, car leases and even cash as perks, depending on what they were able to sell investors. The SEC has panned some of these index annuities and most major firms no longer touch these products.

The bottom line on annuities: while they can be a solid financial instrument for the right purposes (such as for estate planning) you should tread carefully when it comes to buying one. Perform your due diligence, vetting the person offering an annuity to you, asking every question you can imagine and signing the contract only when you are convinced it’s the right thing to do. If you’d like to learn more about annuities and whether they should be a part of your investment portfolio, contact us for an individualized consultation.