Couple looking out of a windowThey’re the one retirement financial program that investment pros either seem to love or hate. Here’s a breakdown of the good, the bad and the downright ugly when it comes to the world of annuities.

The Good

First off, what exactly is an annuity anyway? It’s a retirement product that acts very much like a 401(k) or an IRA, but with a few major differences we’ll delve into in more detail. Technically, an annuity is an insurance policy that can be calibrated to pay out a consistent stream of income in monthly, quarterly or annual installments. (Or even one big lump sum if need be.)

This steady stream of income that can last a lifetime is why some investment professionals view annuities as very good, indeed. Stan Haithcock, also known as Stan the Annuity Man, is a nationally-recognized annuity expert. You can learn more about him at stantheannuityman.com. Mr. Haithcock sees annuities as a “guaranteed income floor” that can help provide the foundation of a healthy retirement. “Building a guaranteed income floor for use at a date in the future can be accomplished using deferred income annuities, aka longevity annuities, or income riders. Both can contractually solve to the penny your desired future income guarantees,” explains Haithcock in a posting from Marketwatch.com.

Speaking of that guaranteed income floor, there are a variety of ways that retirees can specify their payouts. Here are a few of the most popular options:

With a period certain annuity, a retiree is guaranteed a specific payment for a defined period of time. You can specify the time that works best for you. Five years, a decade, 30 years…the choice is yours.

As the name implies, a lifetime payment annuity pays a retiree until death. With this type of annuity, there are no beneficiaries.

A joint/survivor annuity is a great choice for married couples because a spouse or other beneficiary continues to receive the specified payments after the death of the account holder.

The final good thing about annuities is that you can contribute as much money as you’d like to them. With 401(k) and IRA accounts, there are limits to how much money you can contribute per year. This unlimited contribution feature can make annuities a great choice for folks nearing retirement who are trying to catch up on funding their accounts.

The Bad

Like any financial product, annuities aren’t perfect for everyone. Before even thinking about purchasing an annuity, it’s crucial to speak with a financial expert about your specific retirement goals and objectives. (A financial expert who ISN’T the annuity salesperson who’s trying to sell you the annuity in question.)

Commissions

The salesperson selling you your annuity is going to charge you a fairly steep commission for their time and effort. Commissions can be as high as 10%, which can eat into the value of the investment.

Surrender Charges

Let’s say you buy your annuity after your retirement age of 59-and-a-half and you decide to cash it out in a year or two. Doing this will trigger something known as a surrender charge, which can be as much as 7% of the value of your account. The surrender charges usually drop by 1% per year until finally dissipating to zero in year seven or eight. But if you have to cash out your annuity early, surrender charges can be a killer!

Annual Fees

Some annuities come with high annual fees that can take a big bite out of your nest egg every year. If you’re looking at fees of 2–3% per year or more, these fees will definitely make an impact.

The Ugly

The ugliest annuity scenario is also, thankfully, the one that’s least likely to happen. What if the insurance company that’s funding your annuity goes bankrupt? If that happens, you could lose all your money! One of the best ways to guard against this nightmare scenario is to make sure that if you choose to invest in an annuity, you at least invest in a rock-solid company with several decades of excellent performance under its belt. The first step is to check the insurer’s credit rating with bureaus such as A.M. Best, Standard & Poor’s and Moody’s. Only go with companies with an A+ rating from A.M. Best or an AA- or better rating from Moody’s and Standard & Poor’s.

So, is an annuity a good, bad or ugly way to fund your retirement? It depends on your specific retirement objectives. Again, the first step is to talk to great financial advisor who has your best interests at heart. Investigate, ask questions and make the decision that’s right for you.

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This Post Has 2 Comments

  1. This is such a boiler plate article especially about the “financial guy.” Maybe they won’t charge “steep” commission. Last time I checked no one works for free. If anyone who knows anything reads this article the bad and the ugly are so presumptuous. The best advice that this article could give is to actually speak to the financial people who are educated about and can give you the best advice. You have to choose which one to work with but most financial people are actually trying to do whats best for their clients. If their clients don’t give them all the info or leave out key facts then it is just like going to a doctor, being misdiagnosed, and saying the doctor is a quack because he didn’t get it right. Maybe the world should understand that everyone is not a mind reader and can only give information based on information given. I actually want to write so much more but this was good enough for a little release.

    1. The purpose of this post is certainly not to paint all financial advisors with a broad brush. The purpose of this post is to educate readers on what they need to look for. There are financial advisors that are paid to push certain types of products from a certain portfolio. And some of the fees listed may indeed be on the high end, but this gives readers some idea of what is high. It’s about putting in a frame of reference. Believe me, I certainly wouldn’t work for free either. I absolutely agree with you about speaking with educated financial people and finding someone you’re comfortable with. That’s key.

      Thanks,
      Kevin Graham

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