To some investors, it’s a dirty word. To others, it’s a warm security blanket.
Such is the Jekyll-and-Hyde existence of the annuity, one of the most reviled – and revered – financial products around, depending on your investment philosophy.
Aggressive investors hate annuities because they take your money, essentially shut off access to those funds and ultimately offer little return once you can get back into them. More passive investors appreciate the reliable income source that annuities can be.
Stan Haithcock, a recognized expert on the subject who has earned a reputation as “Stan The Annuity Man” , says annuities should be viewed as contracts guaranteeing a sum of money paid each year rather than as investments. As a retirement savings vehicle, they’re designed to behave more like Social Security, he says.
“I find it humorous that (advisors) hate annuities,” he said, then admonished financial consultants to, in that case, “advise all your clients not to take Social Security!”
David Blanchett, head of retirement research for Morningstar, says: “People don’t know how they work and what they do.”
Blanchett agrees that annuities aren’t intended to be a large, income-producing investment vehicle. He says they’re more a means for managing your money, and behave more like Social Security and pensions.
He points out that annuities may not be necessary if you’re expecting a significant amount of money from Social Security and pensions, or if you have made strong investments.
“Most people don’t need a guarantee today,” he said.
In case you aren’t aware of how annuities work, here are some of the basics: You give a certain amount of money to an issuer, often an insurance company. Sometimes they hang on to your money for a number of years and invest it, or they put it into an account for you to draw on immediately.
The idea is to have an income stream, often for life, once your working days are over. In many situations, annuity providers will calculate your life expectancy and come up with a formula for monthly or annual payouts based on that time frame.
Haithcock explains that a typical annuity might be structured to start paying out at age 65 and figure that you’ll make it to age 85. That works out to 240 monthly payments. The account balance then will be divided by 240 and disbursed monthly.
In some cases, the annuity will keep paying past age 85 if you have a lifetime guarantee. If you haven’t used up the balance of your annuity account before death, the remainder goes to your beneficiaries.
There are variations on all annuities. Motley Fool points out that there are immediate vs. deferred annuities, meaning you can start collecting on your account right away or wait several years, or in some cases, decades. There are annuities with fixed rates and others that are variable, or more closely linked to market performance.
While many are lifetime annuities, there are fixed-period versions that can be structured to pay out for only a specified period of, say, 10-20 years. Also, you can fund your annuity account with a single premium or multiple premiums. And you can be the sole owner of the account, or own it jointly with a spouse or other beneficiary.
Haithcock maintains that there really isn’t much difference in who offers the annuity, contending they’re more like commodities. He adds that some sellers of the products have been misleading to consumers about their capabilities.
“The industry turns on its head just to get the (sales),” he said. He adds: “The bad reputation has been earned.”
But he points out: “It’s the only product on the planet that will pay you no matter how long you live.”
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