Clear Direction for Your Retirement:

Annuities: The Good, The Bad, & The Ugly Part 4

In this series, we’re looking at the Good, the Bad and the Ugly about annuities but in reverse order. We covered the “Ugly” and the “Bad” in our previous articles, this month we’ll look at the last installment, the “good” annuity. I have stated previously the need for making financial decisions and especially financial product decisions without blinders. That means being educated transparently and fairly about the product at hand and by someone who is required to do so, namely, a fiduciary who has your best interest in mind. Further-more, the decision should be based within the context of a broader financial plan that is unique to you. Bad experiences with any finan-cial product are typically due to a lack of the aforementioned items as well as the advisor not setting proper expectations with the client. 

As you’ll see below, I do believe some annuity products are a better alternative as compared to others given one’s goals. However, I believe investors should have the choice and free-dom to utilize the product they believe is best for their situation but be educated about the pros and cons of said choice. Additionally, annuities are not appropriate for everyone regardless of the type (Fixed vs Variable – see previous articles for definitions).

The Good

Now, it is here that I want to introduce the “Good” side of annuities – it all starts in my opinion with choosing the right type of annuity. Someone saying that all medicines are good wouldn’t be accurate since inherently all medicines aren’t necessarily good for you. It depends on what you need the medicine to treat. It’s the same with annuities, you need to look at specific needs rather than just throwing a good or bad blanket over the entire asset class. 

I said in an earlier article I’m not a fan of variable annuities (the “Ugly”) for many reasons. For some, they may work out just fine, I just believe the common goals that are attempted with those products can be accomplished more efficiently and less expensively elsewhere. So, excluding that category (the “Ugly”), what do I believe represents the good? 

Principal and Risk Protection with

Little to No Fees

One doesn’t need to be a rocket scientist to see the value in the description. If you need the risk of the market for your plan to work, invest defensively and wisely in the market. You don’t need a variable annuity wrapper to do that, it just adds to the expense. 

For assets however that you don’t need at risk or for those where you want to protect your principal and still give yourself the opportunity for decent returns, the Fixed annuity and more specifically, the Fixed Indexed Annuity are just such vehicles. 

The term “Fixed” simply means that your principal is protected or insured or guaranteed by the claims-paying ability of the insurance company who issues the annuity. A “Fixed” annuity typically pays a fixed rate of interest for a period of time similar to a CD. Sometimes these are referred to as MYGA’s (multi-year  guaranteed annuities). A “Fixed” indexed annuity links its returns to the returns of one or more market indices such as the S&P500 or Nasdaq but without the risk of loss in a down year (this is where the real appeal of the FIA comes into play). 

By selecting the right type of annuity for your goals and situation, you have the opportunity to find a product that offers complete protec-tion of your principal from downside risk in the market, has the chance to earn decent interest on your money and can provide various ways to produce lifetime income if needed (like through a Guaranteed Lifetime Income Benefit rider). All of this with little to no base contract fees. Are there trade-offs, sure! Any time you trade risk for safety you will give up something. This can include liquidity and rate of return po-tential (as compared to the risk filled markets). However, common sense should tell you, if you don’t lose money, you may not need to make as much money either to accomplish your goals.

Get an Income Plan!

Did you know that 56% of people worry about running out of money in retirement? 

In my practice, I’ve seen that number much higher, it’s on everyone’s mind. This is where the annuity, specifically the types mentioned here, can really shine in an income plan when balanced well with at-risk investment assets to fight inflation and a comprehensive financial plan. 

A true retirement income plan addresses the following: 

1. When does it start and from where does it come?
2. In what tax order or combination?
3. How will it grow – that is – what is the risk/ reward exposure?
4. How will it account for health related issues?
5. How long will it last?

DO YOU HAVE A PLAN? 

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.