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Everything, whether it relates to finances or not, has its good side and its bad side, and annuities are no exception. Timing is a crucial factor in deciding whether to buy an annuity, so let’s take it for granted that you are an investor. That means you are nearing retirement age and want to protect your current portfolio while earning an acceptable rate of return.
The benefits of owning an annuity are easy to understand and make the product a real possibility for almost everyone at some point in life.
I feel the PROS are:
Tax Deferral: Earnings are sheltered from annual taxation just like an IRA. That is not the case with other low risk cash type options, including CDs and money market accounts.
Safety of Capital: Insurance companies are required to keep a certain level of reserves on hand to ensure your money is safe. Some of the best companies in the industry are stronger than ever today, which makes an investment in those companies a very solid bet. Each state also backs up these deposits with a guaranty fund. For the most part, that coverage is limited to $100,000 but each state is different so it’s best to look in to the laws of your state.
Liquidity: Annuity contracts have a annual free withdrawal provision giving the account holder access to 10-15% of the account value annually without penalty.
Your Yield Is Moderate: Historically, annuities yield a conservative rate of return. Think about the alternatives. Today, CDs are posting average yields of 2%(taxable) in comparison to annuities at around 4%(tax deferred). And as the markets return to normal, yields for annuities, like everything else, should increase. In most markets, you’ll find annuities to be a safe, consistent alternative to market fluctuations.
Maximize Your Income: The Wharton Business School and New York Life worked together to discover the best method for maximizing retirement income. Fixed annuities that allow the owner to receive a constant income for the rest of his or her life, has been proven to be a great way of maximizing retirement funds. Annuities, after owning them for a year, can usually, and perhaps always, be changed into a monthly stipend that will continue as long as you’re alive. Immediate annuities allow you to begin receiving a monthly income right away.
Conversely, the problem with annuities is that agents sell people products they don’t want or need. To avoid this issue, you need to educate yourself to be sure you get accurate advice.
Here are some negatives of annuities.
Short Term Money: Annuities are not the right place to put money if you need all of it back in one lump sum within a year or two. You need to limit your annuity funds for those your can commit for at least five years.
Surrender Schedule: There is no upfront sales charge associated with annuity purchases. But, the investment company will charge you an early withdrawal penalty if you withdraw your cash before the account comes to term. This is a standard practice, and some contracts have surrender schedules in excess of ten years. That will give you less control over your money in the future.
Brokerage Commissions: an agent stands to gain a commission no matter who you choose to broker your annuity. I mention this as a con since brokers will benefit more from certain products over others. It is critical to find out as much as you can so you can recognize the difference between a bad annuity and a good one. Many agents let the thought of a big paycheck dictate which products you see and which ones you don’t.
Liquidity Is a Disadvantage: Okay, I can see you getting confused. Didn’t I include liquidity as a Pro? Yes it was. This can work for or against you and it goes along the same lines as the point I made with short term money. How will you use the money? When will you need it? What part of it will you need? Answer those questions and read the remainder of this article to decide how liquidity affects your situation.
I’ve made it as clear as I possibly can. Before you get going on your research, realize that not everything is black or white. Certain details about your individual financial situation will clear that up and make it very obvious as to whether an annuity is the right choice and which specific product is best.
For a Free copy of the Annuity Report, please be sure to visit Bryan Anderson at www.AnnuityStraightTalk.com - annuities pros and cons
