Clear Direction for Your Retirement:

Annuities: The Good, The Bad, & The Ugly Part 1

Sometimes in life, we make decisions with the very best of intentions but with unfortunate consequences due to not having all the information or the full story at the time. In essence, we don’t know what we don’t know. I’m sure you have your stories or

examples. For me, a good example would be that in my youth, the mantra we were taught for financial success in life was to go to school, get a good education (i.e. College) and go to work for a good company that would be loyal to you and take care of you through better pay and offering retire-ment help through pensions and other retire-ment vehicles. I can see you smiling already. 

Unfortunately, as good as that path can be in many regards, the advice was missing a plethora of information that could have affected my decision points along the way and saved a lot of wasted time and effort on things that wouldn’t necessarily benefit me later. For instance, companies are rarely loyal in our time, most don’t offer pensions any longer and a degree is not a guarantee of financial success. Furthermore, there are few who build significant wealth by saving for retire-ment. It’s better than no retirement saving for sure but most significant wealth is built through building a business that adds value through a product and/or service. While that’s not for everyone, the point is that when it comes to a decision matrix, having the proper details matters tremendously.

Now, let’s apply this thought to our subject of annuities. Most make their decisions about financial products without the full picture and therefore, sometimes the decision is a negative one. This underscores the importance of dealing with a fiduciary who has an obligation of transparency and best interest to their client. As a fiduciary, I’m not anti-annuity but neither am I pro-annuity. That is to say, I could be either depending upon whether that particular financial product is appropriate for a client’s unique situation within the context of their broader financial plan. That said, they are not appropriate for everyone but can be substan-tial income planning tools when used correctly. 

If you spend much time online researching this type of financial product, you will no doubt find many expressing their hatred of these products. I hate to see this since this dogged opinion is usually born out of a bad experience from someone being sold by an annuity sales agent rather than using it stra-tegically within a comprehensive retirement plan. Any plan can go sideways, no doubt, but a product absent a plan is a disaster waiting to happen. I will usually ask annuity skeptics what kind of annuity their bad experience came from, they usually don’t know which tells me all I need to know. I’m all for the right to one’s opinion but I’m also for the right to having the proper facts. 

In this series, we will look at the Good, the Bad and the Ugly about annuities but likely in reverse order. Before castigating a financial tool that has helped millions secure a better retirement income plan or even achieve a safer path to asset accumulation, let’s discover some basic details about these products so we have a better understanding. The fact that someone had a bad experience doesn’t make the product bad per se’, it just makes their experience bad and there could be many reasons that’s the case. In fact, in 2021 almost $255 billion funded these types of products. That’s a lot of money flowing into instruments that are supposedly so terrible. 

So, what are some common thoughts on the hated aspects of annuities? Some typical comments might be as follows:

Hate Traits:

1. Really Long Contracts
2. Not Very Liquid
3. Lots of Fees
4. Too Complicated
5. Locking in low rates
6. My neighbor’s, brothers, cousins, former roommate got burned by one of those

As with anything, there is a measure of truth contained in those concerns. I’m not down playing the concern or anyone’s negative experience by any means. It’s unfortunate to be sure. However, let’s fairly and accurately take a look over the coming months and try our best to separate fact from fiction. 

The basic types of annuities and their risk implications are:

1. Variable Annuity – Is a security that can be invested in the markets. Risk is born by the annuity owner.
2. Fixed Annuity – Is not a security. Risk is born by the insurer and protections and guarantees are contractually stated to the annuity owner.

In the next installment, we will discuss the Ugly and the Bad about annuity products.   

I hope this is helpful to your retirement journey. Call us, come see us or visit us at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you Clear Direction for Your Retirement®.

Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appro-priate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.

Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.

Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first

5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. With-drawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.