The Road to Retirement
November 06, 2019
The question often asked is “In what planning situations does an annuity make good sense and when does it not make good sense?”
That question is impossible to answer until it is revealed what type of annuity the questioner is explicitly referring to, the financial situation and the risk parameters of the account holder.
Generalizations about annuities are considerably inaccurate. There is a huge gap of understanding between a fixed deferred annuity, a fixed indexed annuity, a fixed immediate annuity, and a variable annuity. Each is an “annuity,” but the contract forms are designed to be used for totally different purposes. Yet most consumers and advisors routinely generalize about annuities, making their conclusions flawed and worthless. Is the annuity’s principal and interest protected or is it at risk? Some are designed for growth, others for income. Some credit interest tied to a bond index, others are tied to a stock index. Some have fees, others do not. Some are better suited for IRAs and deferred accounts and others non-qualified money. Some favor those who are still contributing to a retirement plan, others favor a lump sum. Some have caps on growth, some have participation rates, some have a margin or spread. Some have 10% annual liquidity, some have liquidity that increases to 50%.
A person’s age is a factor. Is the client employed or retired? What is the net worth? What assets are liquid vs non-liquid? What is the time horizon for the funds? What % of assets will the annuity replace?
Here Are 3 Planning Situations When Annuities Make Good Sense:
1. Where the Goal Is Immediate Income as High as Possible on a Guaranteed Basis
When immediate income is the primary goal, an immediate annuity may be appropriate. A Period Certain fixed immediate annuity will generally provide a greater amount per year than can be assured from any investment alternative. However, there is no access to the principal and once the Period expires, it will not provide any death benefit.
2. Where the Goal Is Income in the Future
A Fixed Deferred Annuity with a Guaranteed Lifetime Withdrawal Benefit Rider is ideal where the goal is income in the future, allowing the insured to activate the distribution of income at a time when needed. A death benefit of the accumulation value will be transferred to the beneficiary.
3. Where the Goal Is Accumulation of Capital
Where the goal is capital accumulation, preservation of principal, and a death benefit, a Fixed Indexed Annuity offers the highest earning potential without risking the principal. Combined with a Guaranteed Lifetime Withdrawal Benefit, it provides strong accumulation, guaranteed income and safety of principal. An immediate annuity is clearly not suitable. A variable annuity, unless its cash value is invested in the fixed account, does not offer safety of principal.