How Annuities Might Affect Your Finances

(Bloomberg) -- Have you ever heard the “A-word” in the world of finance? It’s annuities.

Perhaps you’ve seen an ad or read something about how annuities are bad, and you should avoid them like the plague. In reference to the ads I’ve seen, I agree to an extent, but there are plenty of annuities that can be beneficial to your portfolio.

Some allow for income riders and uncapped strategies and might not charge the high fees you’ve heard of, all while protecting your principal from market volatility.

There are literally thousands of annuity options available — just do a simple Google search, and you’ll begin to see your choices. But which one is right for you?

It’s important to take into account your personal goals and objectives that you want out of your portfolio: Do you want retirement income?

Do you wish to leave a legacy for your family? Are you looking for growth opportunities? There are several options, so keeping your goals in mind will help narrow down your choices.

Remember: One size does not fit all when it comes to purchasing an annuity — just because your neighbor bought one from XYZ Company does not mean that exact annuity will meet your needs. What should you look for when considering an annuity? First, let’s explore the basics of annuities and how they stack up to the misconceptions you might’ve heard.

The Basics

Annuities are products offered by insurance companies and provide the owner guarantees on their assets. They protect your principal from market volatility but allow you to participate in a chosen index to receive a portion of any gains.

Some annuities allow you to receive all of the upside, less any participation rates, during a contract period, and you lock in those gains after each contract period. 

Annuities with riders can create a guaranteed income stream that could last the rest of your life, as well as your spouse’s, which is what attracts many people to purchase one. Maybe you’re looking to fill a gap in your retirement income; with the right annuity, you can start to work toward that goal. Many annuities will offer an average, tax-deferred growth rate over an amount of time called the surrender period.

You may be wondering what the right amount of money to put into an annuity is. Many financial professionals, myself included, use the Rule of 100 as a general guideline to get started. This rule simply takes the investor’s age and subtracts it from 100. For example, if an investor is 60 years old, he or she may want to look at positioning 40% in an annuity.

You will also have to go through suitability with the annuity company; they make sure clients have enough “liquid” assets in other positions to be purchasing an annuity. Having liquid assets in other accounts is important since once you buy an annuity, you’ll have a surrender period. During this time, you only have access to a portion of the money — usually around 10% in free withdrawals.

Some companies allow you more access to those funds, too. If you miss a year, you can then withdraw up to 20% the following year, or after a set amount of years, you can walk away from the annuity and receive your premium back without any fees. This varies from company to company, so be sure to ask your financial professional about the details of your particular product.

The Misconceptions About Fees

I’ve met with several people who think all annuities come with a lot of fees, making asset accumulation next to impossible.

It’s true that some annuities come with fees that might slow down that growth; they can range anywhere between 2% and 4%.

If you’re considering an annuity with high fees, do your homework to see what you’d pay for it and if the costs are worth your purchase.

But just as some annuities come with high fees, others come with lower fees, such as fixed index annuities (FIAs).

Generally, the only fees with FIAs occur if you choose to purchase a rider or withdraw money before your surrender period is over.

Fees can range between .75% and 1%, but you’re getting something out of them, such as guaranteed income, death benefits, or liquidity options.

Surrender fees are another way you can incur some charges while you have your annuity. Make sure you’re purchasing an annuity with the right term — if you know you’ll need that money in seven years, steer clear of a 15-year annuity.

While surrender charges start high, they gradually decrease throughout the life cycle of your annuity term. Knowing how long your surrender term is can help you avoid those charges. Ultimately, it’s important to keep your needs in mind when considering an annuity.

Find What Works for You

Find out what you are looking for when it comes to your goals. I’m willing to bet you can find an annuity that will fit in well with your portfolio, whether it be for growth, income, or leaving a legacy. Finding a seasoned financial professional with access to multiple annuities can help.

They can do the research and help you find an annuity that best fits your financial objectives. There’s an annuity out there that can meet your needs.


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