Well, it finally happened. The check actually was in the mail and it came right on schedule, too. Twenty years ago, I decided to add an annuity to my retirement planning program and it kind of snuck right up on me. That was a really pleasant surprise. In a world where the annuity often has its detractors (and perhaps with good reason), I am pretty happy with it. I felt for me it was a good decision. Depositing that annuity check for $483.46 (the first of 240 for the next 20 years!) has comforted me quite a bit since February 1st. With the market in chaos, even more so in the past several weeks, I guess it’s congratulations to me! I made it to annuity day and now another of my nest eggs has hatched!
What Is an Annuity?
An annuity technically is not an investment. First and foremost, an annuity is an insurance product, which means you buy it because it reduces your risk. Some annuities, like variable annuities, do have a selection of stock and bond portfolios available as investment choices inside the insurance contract, but the one I bought was a fixed rate annuity which for me had no investment risk on my return and payout. I knew 20 years ago what I would be getting back to the penny when I bought it.
There are many different kinds of annuities and they accomplish different goals. Some annuities pay you income immediately. Others accumulate tax-deferred interest and can be converted into a steady income when you’re ready for it. In my case, that time is now and it will pay me an income stream for the next 20 years guaranteed (to me or my wife or beneficiaries, or even longer if I survive into my 90s).
If you’re asking “Why should I invest in an annuity or which kind is the best for me?”, the answer will really depend on your unique retirement goals and financial circumstances.
Why an Annuity?
When you consider an annuity, you need to understand exactly what it is and what it means. I had a leg up on this process since back in 2000 when I made the purchase, I was working for a very large bank and had all the information and access to good retirement planning. In fact, I was actually advising clients on what they should consider for their own retirement plans. It’s important to note here that an annuity may not be the right cup of tea for everyone.
There are at least a dozen reasons why some people shouldn’t buy an annuity. If you’ve done some research on the subject, you’re probably already aware of a few of them such as you love investing in the stock market and making your own decisions or you aren’t comfortable with built-in fees that you may not easily be able to determine. Annuities certainly have those. If you have enough money in savings and investments that the prospect of outliving your money is no better than remote, then an annuity is probably not for you. But…
Here Are 5 Reasons to Buy an Annuity
Typically, you want to consider an annuity only after you’ve maxed out other tax-advantaged retirement accounts, such as 401(k) plans and IRAs. But beyond that, there are at least five other situations where buying an annuity can make a lot of sense. They are:
1. The stock market freaks you out
Typically when a financial advisor offers you a guarantee, you have to tread carefully. But if just watching CNBC elevates your blood pressure too much, then an annuity may be your best answer. Equity-based investments fluctuate in value, but fixed rate annuities can protect your principal value, ensuring that your investment remains fully intact to earn income in the future.
This can be especially important if you are very close to or already retired. Annuities can provide an immediate income and eliminate the worry of making up potential losses.
2. You want to know exactly how much interest you’re going to make
Fixed rate annuities offer guaranteed returns. So if a steady income is your primary motivation for making the investment, annuities provide just that. But some annuities will provide you with a variable return allowing you to participate in higher risk/higher yielding options. Those will also assign a guaranteed minimum return. Fixed annuity rates usually pay more than bank CDs.
3. You want guaranteed and predictable income
Annuities can begin paying out an income stream immediately or you can buy deferred annuities with income riders that will increase each year until you decide to start taking an income (like how your Social Security benefit increases each year you don’t touch it).
4. You can’t get life insurance
Annuities can provide some of the same benefits as a life insurance policy. You don’t need to qualify for it the way you do for life insurance.
If you have a health-related condition that makes life insurance impossible to get or prohibitively expensive, an annuity might be a really good alternative.
5. You want some long term care protection
Since people are living longer than ever, there is growing concern for long-term care (LTC). Straight long-term care insurance policies are expensive, particularly as you get older. Hybrid annuity insurance products with LTC benefit and LTC double benefit from income riders are options not meant to completely pay for 100% of your LTC costs, but will help pay a portion of it.
My Retirement Strategy
Annuities can serve very specific purposes, and if you happen to fall into one of those scenarios, then an annuity can be a game-changer and a real plus for you. No, I am not trying to sell you an annuity here. Those days, for me at least, are now in my rearview mirror and was never part of my fiduciary agenda. But my point is this: like anything else in the world of finances, there are some good things to be said and some negative things that make all the rounds out there. Annuities are certainly one thing to at least consider, as part of a larger retirement plan, and I am glad that I did.
I had already invested and was active with a large sum of my money in the stock market, was a regular max contributor to my company 401(k), owned a couple of IRA CDs, was regularly saving money in a money market account, owned my own home, and had ample life insurance for myself. In my case, the purchase of an annuity was simply another part of my overall retirement plan.
What Exactly Does It Mean to Annuitize?
To annuitize is like “flipping the switch” and starts the taking of income from an annuity. You convert your account from something that hopefully grows—either by making new additions to the account or letting interest payments grow—to something that provides regular income for an extended period of time. But annuitization is different from making simple withdrawals. When you annuitize, you set up a systematic guaranteed payment plan.
Here’s a Weird Fact!
With all the talk and fuss about annuities, almost no one ever actually goes the full route and annuitizes! In 2018, 84% of the people that owned annuities surveyed said that receiving a monthly check during retirement is important to them; yet only 14% of Americans have actually annuitized.
People tend to use an annuity for a while and then take the money elsewhere (possibly cashing out, or just making lump-sum withdrawals if the need arises). In fact, I have a family member with two annuities, one of which is annuitized and the other which is used for lump-sum withdrawals as needed. The main reason to annuitize is to get a guarantee (from the insurance company, there’s no government guarantee) of the certain payment structure.
You may have seen the frequent TV commercials about companies that offer to buy out your annuity sum (at a big discount to them of course so tread carefully if you’re considering that).
If you buy an annuity and then actually annuitize, it’s typically an irrevocable decision. Once you make the choice, it’s difficult or impossible to go back. The insurance company takes steps to manage the risk and keep up their end of the bargain, so it’s difficult to unwind from that complex transaction. If you do, there will be fees of course that will discourage you. Most people don’t buy an annuity. But there are certain people in certain circumstances for whom an annuity would be a great choice. I am a happy purchaser these days.
Have you considered an annuity? Are you negative about them or positive? Do you know as much as you should about them and if not, why not at least look at the possibilities?