Do not waste your time considering annuities if you cannot find one of the following Annuity Profiles that matches your situation.
1. Security Oriented – Reached a stage in your life when market risk is not appealing.
2. Value Freedom from Oversight – Want money to grow securely but do not want to be bothered with constant monitoring. Set it and forget it!
3. Want a Pension Style Income – Can appreciate a reliable stream.
4. Like Avoiding Probate for Heirs – Knowing that money can transfer efficiently and IRAs can be stretched over your children’s lifetime.
5. Your Healthy and Plan to Live a Long Life – Longevity makes annuities work in your favor.
The above scenarios do not have to be an all or nothing strategy. Having specific amounts of money allocated to specific purposes allows for a blending approach when accomplishing retirement objectives.
The above attributes are not as well suited to variable annuities# where securities risk and higher fees are typical.
Dick and Eric discuss the above Annuity Profiles in more detail.
Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Case Study Example from the Insurance Information Institute:
Is an Annuity Right for You?
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Why should I consider purchasing an annuity?
Annuities can serve many useful purposes.
If you are in a saving-money stage of life, a deferred annuity can:
Help you meet your retirement income goals.
Help you diversify your investment portfolio.
Help you manage your investment portfolio.
If you are in a need-income stage of life, an immediate annuity can:
Help protect you against outliving your assets.
Help protect your assets from creditors.
Annuity Guys Video Transcript:
Dick: You know annuities really aren’t for everyone and Eric and I…
Eric: Shock! Oh my god.
Dick: Eric and I’d like to kind of tackle that today, and just be maybe a little bit blunt and explanatory, on those that an annuity works well for and those that don’t.
Eric: You’re just saying “Don’t waste time, either yours or ours if…”
Dick: Well, now we don’t mind to waste a little of our time, but it’s their time that they’re concerned about.
Eric: Okay, their time. So if you don’t fit the annuity profiles that we’re going to talk about, probably not best to invest too many more hours pondering, whether or not an annuity fits your situation.
Dick: Right, and many times folks, someone has recommended an annuity to you. Could be an adviser, it could be a friend and it’s really wise to look at your options, and consider what does make sense, what doesn’t make sense, whether it’s an annuity, or an ETF, a mutual fund^, whatever it is that you’re thinking about. However, there are some things about an annuity that make them good for some and not good for others.
Eric: Right, so we always talk about **guarantees safety, **guaranteed growth, , those are some of the things. So if you’re a mutual fund^s stock picker and you like that security as being in the market, you like that aggressive growth profile, an annuity’s probably not.
Dick: Right, an annuity wouldn’t be the right thing. I mean you’re less security-oriented. You’re more willing to take risk. Another thing would be that you would really look at this market, and you would say to yourself that over the next decade or two, that you think things are going to really rock and roll. They’re going to do well. If you’re the type of person that really believes that we’re in for a tough couple of, the next 20 years then you may find yourself thinking that an annuity is pretty appealing.
Eric: Yeah, or if you like to be actively involved.
Eric: You know if you’re one of these hands-on, you want to be the trader, you want to have your fingers in everything. I flash back to the Ronco commercials of yore, you know? The little toaster, where it used to say, you know, “You set it and forget it.” If you’re that mentality, then maybe an annuity is kind of an appeal, because it’s one of those things you want that **guarantee, that aspect of the annuity. You want that regular check coming.
Dick: So folks, if you like the idea of freedom from oversight you don’t have to be involved in the day to day activity, the monthly ups and downs of the statement coming in. If that appeals to you then yes, you’re probably going in the right direction.
Eric: Yeah, if you run to the mailbox get that investment statement and go, “Yes,” then that’s probably not an annuity person, you’re more of an investment person.
Dick: Right, exactly.
Eric: So pension-styled income, we talk about you like the idea of getting that check every month. If that appeals to you…
Dick: Well, it’s quite different. There’s nothing else out there, there just literally, is nothing that gives you income **guarantees like an annuity.
Eric: Well, a pension.
Dick: Well, and that is an annuity. I mean Social Security it is a form of an annuity type arrangement. Pensions are annuity type arrangements, and so if you have a lump sum of money, and you want to know that you’re never going to run out of money, never going to run out of income and you value that, then an annuity really is in that line of thinking.
Eric: Right, if you’re more of a person who says, “You know what? I’m just going to take out a fixed. My investments I’ll manage them. I can pull out 3.0-4.0-5.0% every year and I’ll be happy. I don’t need that **guarantee aspect. I’m comfortable with a little.”
Dick: Right, and if inflation goes crazy, and you start getting into your principal that type of thing that you’re comfortable with making those adjustments along the way.
Eric: You can flex up and down.
Dick: Right, right. Again, you’re kind of out of that mode of auto-pilot or set it and forget it. You’re a hands-on, do-it-all.
Eric: Hands-on, right.
Dick: And we have to realize too, this is another issue that I’ve run into with clients and I know you have. Is that as we age, as retirement progresses along we have less and less tolerance or we see our clients have less and less tolerance, for being right on top of things and manipulating it themselves. They really want a lot of times, more of that auto-pilot setup.
Eric: Right, exactly, and I think people start to feel more secure. When you don’t have a salary check coming every month, all of a sudden that regular flow of income that you’re used to getting, if you’ve been in one of those jobs where you got that check every month, then all of a sudden switching to something that’s a little more uncertain.
Dick: Right and you have to make those decisions.
Eric: And they may have been a little bit more aggressive and had tolerance of the market’s ups and downs, at that point in time in their life, but all of a sudden, now they have to get that monthly paycheck. Those ups and downs become a lot more painful.
Dick: It makes a big difference in your ability to sleep well at night and to feel comfortable with what you’re doing.
Eric: Exactly. Speaking of feeling comfortable one of the things, probate comes in. Everybody’s suing everybody these days, but one of the nice things about a lot of states is that annuities are protected, basically from creditors.
Dick: From creditors, that type of thing, and yet even for probate it’s such an efficient way to take money around the probate court, because it goes directly to the heirs, and so that’s good. Also folks, if you have an IRA, that IRA can be stretched, stretched out to your heirs. And insurance companies are one of the few financial institutions that really do that effectively. They are just set up for it. It’s the way they work. So in effect, you can transfer an IRA. Give your children maybe, the equivalent of their own retirement in the future from your IRA, if you don’t need to spend it.
Eric: Exactly. Yeah, and kind of the last profile that I would say that really is key for an annuity, if you think you’re going to have some longevity. You’re going to live a nice long life and you don’t want to have to worry about running out of money, that’s it. That’s the sweet spot right there.
Dick: Right, right. Well, and you know Eric, we’ve always said and we tell people all the time, look we’re not trying to beat the insurance company or beat up on the insurance company.
Eric: Occasionally, I like to beat them, but…
Dick: But if our clients can win. Obviously, we’re always going to err on our client’s side. So if someone has longevity, they really believe that they have the possibility of living that longer life, they really will actually, statistically come out ahead, and win against the actuaries at the insurance company. So then the rate of return isn’t just decent or acceptable or reasonable, it’s very good, and so that’s where we like to have that conversation. There’s also a flip side to this, which I just might want to mention because there’s a few of you folks out there that are just the opposite. You actually believe you’re going to live a much shorter life, and yet you want to know that you can maximize the money that’s coming in to you, never run out and spend all you want while you’re still here. The thing you want to do there is look at an immediate annuity, that’s medically underwritten, because you’ve got some medical condition that you believe will shorten your life, and we can actually do a medically underwritten annuity.
Eric: Right, you may have a condition that basically says, “You know what? Statistically, it takes a couple years off your life expectancy.” Then they rate that based off of that new age that they calculate.
Dick: Right, right. So Eric, is it possible that some people are wasting their time considering annuities?
Eric: Well, most definitely. I mean you always want to look at all your options.
Dick: You do.
Eric: Obviously, the answer is annuities are not for everyone.
Dick: That’s true.
Eric: So hopefully our little five points here, that we’ve got on this page, will help you determine whether an annuity is right for you.
Dick: Exactly. You really have to weigh your situation over and when you go over these points, if a lot of them sound like you, and make sense to you then go forward, do your research, go consider an annuity, and if it’s the opposite?
Eric: Right, if you can’t hit one of the items on the checklist.
Dick: One or two, yeah, just sayonara.
Eric: Thanks for checking us out today.
Dick: Thank you.