Are Annuities a Good Investment?
This is one of the most common questions we get asked from both new clients and existing clients: are annuities a good investment?
For those that are extremely skeptical, it’s usually because a financial planner or advisor has told you to steer clear of annuities, or maybe you’ve even heard about a friend’s bad experience with one. Perhaps even more common is that you’ve read some articles online that have told you annuities are awful.
We wanted to dedicate an article to fully answer the question "Are annuities a good investment?"
When Annuities Can Be Bad
When a financial advisor is telling you to stay far away from annuities, they’re referring to variable annuities.
Variable annuities are tied to the stock market performance, and they have hefty fees involved. What can happen is that the fees can end up being higher than any interest you earn, which means you actually lose money!
The whole point of an annuity is to preserve and grow your hard-earned money, so the idea that you could potentially lose money with an annuity is both risky and scary, especially if you’re around retirement age.
So, are variable annuities a good investment? Since we’re making recommendations for the senior audience, we’d say that variable annuities are not a good or safe place to put your money.
However, variable annuities are just one type of annuity, and we’ve found that most of our clients didn’t know this!
There are other kinds of annuities that can be absolutely wonderful for the senior market, and we’d like to take a little bit of time to explain how those can be safe and how they can quickly and predictably grow your savings.
When Annuities Can Be Great
When you enter retirement, your outlook on money will shift from the accumulation stage to the preservation stage. Your focus is no longer on making money – it’s about preserving it and making it last as long as possible.
This is where fixed annuities come in handy. A fixed annuity is a very straight-forward contract. In essence, you are guaranteed a specific interest rate – right now, it’s at an all-time-high of 4% – and that rate is locked in for a certain period of time. The most common length of a fixed annuity contract is 5 years.
So, let’s say you have a fixed annuity with a 4% interest rate, and it’s locked in for 5 years. You decide to start out the annuity with $50,000. Here’s how it would perform.
It’s very predictable – you know exactly how much your money will grow every single year – plus, you’ve made over $10,000 by the end your contract!
There is the option to take a 10% free withdrawal after the first year of your contract. That way, if you need to access some of that money, you can. In this example, that means you could take out $5,000 each year if you needed to.
The ability to take out 10% of your principal is usually the biggest sigh of relief from folks because you do have access to your money. It’s not all locked up like many people think!
So, can this kind of annuity be great? Absolutely! We come across a lot of individuals who have money saved up, perhaps in a savings account or a CD, and they simply didn’t know that there was a safe way to earn a much higher interest rate on their money.
Alternatively, many individuals have their savings in the stock market, and while they may be making better interest rates right now, we all know how volatile the market can be. At this stage in life, it’s much easier to sleep at night knowing your life’s work is being preserved and cared for in a safe place like a fixed annuity.
A Hybrid Annuity – The Best of the Stock Market with None of the Risk
If participating in the stock market is a must-have for you, there is a type of annuity that might interest you. This is called a Fixed Indexed Annuity (FIA), and in sum, you get to participate in the gains of the stock market while avoiding all of the losses.
We aren’t 100% sure how your money will grow each year, but what we can guarantee is that even in a negative year, the worst you can do is that your account stays the same. You will never lose value.
What’s attractive about an indexed annuity is that you get to capture more of the stock market gains. The insurance company takes on the risk – they guarantee you that you won’t lose money, but when there is a big gain, they cap your gains. In a good year, where the stock market makes 12%, you might be capped at 6% or something similar.
So, you have the opportunity to do better than a fixed annuity, which is at 4% right now, but there is the chance your investment might not grow if the stock market has a bad year. But again, you can’t lose anything.
Out of every 10 clients who purchase an annuity with us, 8 of them are going to prefer the sure bet of a fixed annuity. There are no moving parts, you don’t have to think about how the stock market is performing, and you know you’ll get a great return of 4%.
For the other 2, they like the indexing option where they have the chance to join the party when the stock market is doing well. But if their friends are losing money when the stock market tanks, they can stay comfortable knowing they aren’t losing anything.
Is An Annuity Right For You?
Annuities aren’t for everyone, so we’ve reviewed all of the scenarios we’ve come across and have compiled a list for you. If any of these situations apply to you, an annuity can be a great addition to your retirement portfolio:
- Do you have a 401(k) or IRA that you are no longer contributing to?
- Do you have money sitting in a savings or checking account that isn’t being used?
- Do you have money in a CD that’s earning a very low interest rate?
- Do you have money in a Money Market that’s earning a very low interest rate?
- If you have money in the stock market, would you be financially devastated if it tanked overnight?
- Do you have a money that isn’t being used and that you don’t plan to use in the future?
If you answered “yes” to any of these questions, an annuity is a fantastic solution for you. Our clients are over the moon when they realize the potential of an annuity – many individuals simply don’t know what they don’t know!
Are you interested in speaking with one of our licensed agents about whether or not an annuity can help you preserve and grow your savings? Contact us using the link below.
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