As I speak with callers to my Safe Money & Income Radio Shows, I hear all sorts of ideas about what annuities are and what they can do. There is a lot of good information available, but at the same time there is a lot of conflicting information that leaves many people leery about even looking into annuities any further.
There are those who say you should never consider annuities at all, of course these are generally people who want you to invest or keep your money with them! Obviously, there is no one type of financial product that is good for all people all the time. In order to sort through the confusion and misconceptions I thought it would be helpful to clear up some of these perceptions.
First of all, when financial advisors tell you to stay away from annuities they generalize and assume all types of annuities are the same. That would be like saying all stocks are the same, for example equating penny stocks with Blue Chip stocks; or saying all mutual funds are the same. They take the worst examples- primarily variable annuities- and apply their negative features- high fees- hidden fees- high risk- to all annuities. That is very deceptive in my opinion.
The truth is that insurance companies- life insurance companies- are set up to handle only two types of risk- dying too soon or living too long. Of course, we all know dying too soon is protected with life insurance. And annuities are the only financial product in existence that can protect against living too long and outliving your money. That really is the primary purpose of annuities.
So how can the insurance companies do this? Well it’s called the Law of Large Numbers.
For example, let’s say a young person takes out a life insurance policy for $250, 000 with a premium of $15 a month and gets killed in a car accident a week later. We know the insurance company will pay that claim because they have so many other people paying in that they will never have to pay a claim on.
Similarly, with annuities- living too long. The risk the insurance company is taking is that you will outlive your money and then you will be living off their money. But they have so many other people that have their money with them that will not outlive their money that they can afford to pay for those who do outlive their money. It is a win-win situation as the insurance company can benefit from holding your money all that time and you are able to take more money out of your account than you would using any other combination of investment vehicles.
Everybody understands that Social Security and Pensions are meant to provide lifetime income in retirement and that is the primary purpose of annuities. Of course, there are other benefits that come with annuities- for example fixed annuities can be used for short term growth like CDs but generally with better rates and more liquidity and tax advantages. And Indexed Annuities will protect your money from downside risk while participating in market upside and will lock in those gains so you never lose them. Contrary to what many financial advisors state, these products have produced significant gains for many of my clients over the past several years of this bull market.
But again, the primary purpose of annuities is to create lifetime income that you never have to worry about receiving. When you retire and you need more than your Social Security check to meet your basic living expenses to support your lifestyle only an annuity can guarantee that for you.
The great thing about that is that it can do that for you for less money than you would need relying on the 4% Rule to manage your money that is at risk in the market. Why bet on your retirement money lasting as long as you do when you can guarantee it will last? Why spend 10-20-30 years of retirement watching the market wondering and worrying whether something may happen that will deplete your nest egg?
Finally, similar to Social Security, where you will receive more lifetime income the longer you wait to start collecting, if you have money in an annuity for lifetime income that you will start at a later date- you can have guaranteed growth on that money for income or wealth transfer as high as 7% compounded interest a year.
You can also have your income double if you need home health care or institutional care. And, unlike pensions and Social Security, these annuities will pass on any unused funds to your heirs. Overall this is a great way to create peace of mind and keep things simple in retirement so you can enjoy what is really important to you- all the things you dreamed of doing when you were retired and would have the time to do them. You can sleep well at night knowing that those dreams can be a reality!
Robert P Kelly has been helping people save money on their taxes and move to a more secure retirement for over 18 years.
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