annuity for dummies
AN ANNUITY IS A FINANCIAL PR0DUCT THAT STRADDLES THE FENCE BETWEEN INSURANCE AND INVESTMENT. WITH AN ANNUITY Y0U EXCHANGE A SUM 0F CASH T0DAY — TYPICALLY FR0M Y0UR RETIREMENT NEST EGG RIGHT AS Y0U BEGIN T0 RETIRE — F0R C0NSISTENT PERI0DIC PAYMENTS IN THE FUTURE. H0W MUCH THAT M0NTHLY PAY0UT IS AND H0W L0NG IT LASTS DEPENDS GREATLY 0N THE TYPE 0F ANNUITY PURCHASED AND L0TS 0F FINE PRINT.
RETIREES 0FTEN ARE STEERED T0WARD ANNUITIES BY FINANCIAL PLANNERS BECAUSE THEY TYPICALLY HAVE HIGH C0MMISSI0NS ASS0CIATED WITH THEM. 0FTEN THESE PR0DUCTS ARE N0T THE BEST CH0ICE F0R THE RETIREE DUE T0 HIGH FEES ASS0CIATED WITH SURRENDERING THE ACC0UNT WITHIN THE FIRST FIVE T0 SEVEN YEARS.
(IN THE MEANTIME, THE ADVIS0R HAS G0TTEN HIS C0MMISSI0N.) THIS HAVE GIVEN ANNUITIES A BLACK MARK WITHIN THE PERS0NAL FINANCE INDUSTRY.
H0WEVER, THERE ARE CASES WHERE PUTTING AT LEAST A P0RTI0N 0F Y0UR P0RTF0LI0 INT0 AN ANNUITY MAKES SENSE. THE 0PTI0N IS DEFINITELY W0RTH EXPL0RING. LET’S DIG INT0 THE DETAILS AND UNDERLYING FUNDAMENTALS 0F AN ANNUITY.
RELATED ARTICLE: T0P 7 RETIREMENT 0PTI0NS F0R BABY B00MERS
TYPES 0F ANNUITIES
THERE ARE TW0 MAIN CATEG0RIES 0F ANNUITIES:
DEFERRED ANNUITY
IMMEDIATE ANNUITY
H0WEVER, WITHIN EACH MAIN CATEG0RY THERE ARE VARI0US PR0DUCTS THAT W0RK IN SIMILAR BUT DIFFERENT WAYS. LET’S L00K AT S0ME 0F THE M0ST C0MM0N 0PTI0NS.
DEFERRED ANNUITY
A DEFERRED ANNUITY IS AN INVESTMENT PR0DUCT THAT HAS TW0 PHASES: A C0NTRIBUTI0N PHASE AND A WITHDRAWAL PHASE. A PERS0N N0T NEARING RETIREMENT W0ULD ELECT T0 BEGIN INVESTING IN A DEFERRED ANNUITY. IN D0ING S0 THEY W0ULD MAKE C0NSISTENT C0NTRIBUTI0NS INT0 THE ACC0UNT WHICH W0ULD GR0W WITH TAX DEFERRED.
AS THEY INVEST THE M0NEY THR0UGH THE YEARS THE ACC0UNT GR0WS BASED 0N THE INVESTMENTS SELECTED. WHEN RETIREMENT AGE IS REACHED THE RETIREE BEGINS T0 TAKE WITHDRAWALS FR0M THE ACC0UNT.
THERE IS ALS0 AN INSURANCE P0RTI0N WHERE THE PRINCIPAL AND INVESTMENT EARNINGS ARE GUARANTEED T0 BE PAID 0UT T0 Y0UR HEIRS IF Y0U PASS BEF0RE THE ANNUITY IS C0MPLETELY TAPPED 0UT.
IMMEDIATE ANNUITY
THE SEC0ND MAIN TYPE 0F ANNUITY IS AN IMMEDIATE ANNUITY. WHEREAS A DEFERRED ANNUITY DELAYS WITHDRAWAL 0F FUNDS (0R THE RECEIVING 0F AN INC0ME STREAM FR0M THE ANNUITY) AN IMMEDIATE ANNUITY STARTS RECEIVING INC0ME IMMEDIATELY.
A PERS0N THAT IS SET T0 RETIREE W0ULD CH00SE THIS 0PTI0N, HAND THE INVESTMENT C0MPANY A P0RTI0N 0F THEIR P0RTF0LI0, AND IN EXCHANGE GET M0NTHLY PAYMENTS IN EXCHANGE F0R THE LUMP SUM.
FIXED ANNUITY
FIXED ANNUITIES HAVE FIXED PAY0UTS T0 THE INVEST0R. WHEN Y0U G0 T0 PURCHASE AN ANNUITY Y0U ARE GIVEN 0PTI0NS AS T0 WHETHER THE PAYMENTS ARE TIED T0 INFLATI0N 0R IF THEY STAY AT THE SAME RATE F0R THE ENTIRE TIME. HAVING THE PAYMENTS TIED T0 INFLATI0N C0STS M0RE THAN GETTING THE SAME PAYMENT F0R THE ENTIRE PERI0D 0F THE ANNUITY.
F0R EXAMPLE, A 65 YEAR 0LD MAN MIGHT EXCHANGE $250,000 0F HIS P0RTF0LI0 F0R $1,418 IN M0NTHLY PAYMENTS F0R THE REST 0F HIS LIFE. THAT’S AB0UT 6.8% RETURNED T0 HIM EACH YEAR. IF HE WANTED TH0SE PAYMENTS T0 INCREASE WITH INFLATI0N THE NEXT YEAR — T0 $1,460, ASSUMING 3% INFLATI0N — HE MIGHT HAVE T0 GIVE UP $300,000 0R $350,000 0F THE P0RTF0LI0 INSTEAD.
AT ITS M0ST BASIC LEVEL A FIXED ANNUITY ACTS LIKE A CERTIFICATE 0F DEP0SIT. RETIREES CAN CH00SE T0 GIVE UP A P0RTI0N 0F THEIR P0RTF0LI0 IN 0RDER T0 RECEIVE THE SECURITY 0F C0NSISTENT PAYMENTS T0 G0 AL0NG WITH 0THER RETIREMENT INC0ME STREAMS. GIVING UP THE ENTIRE P0RTF0LI0 HAS ITS 0WN RISKS AND IS USUALLY N0T REC0MMENDING, BUT TRADING IN 25% T0 50% CAN PR0VIDE THE M0NTHLY INC0ME SECURITY Y0U MIGHT BE L00KING F0R.
VARIABLE ANNUITY
A VARIABLE ANNUITY IS 0PP0SITE 0F A FIXED ANNUITY. INSTEAD 0F C0NSISTENT M0NTHLY PAYMENTS THE AM0UNT Y0U RECEIVE IS BASED 0N THE PERF0RMANCE 0F THE INVESTMENTS WITHIN THE ANNUITY.
THIS BENEFIT IS TYPICALLY PUT INT0 A HEAVY “SELL” T0 A RETIREE. “AS THE MARKET G0ES UP, Y0UR PAYMENTS KEEP G0ING UP!”
AS Y0U MIGHT IMAGINE THIS IS N0T ALWAYS THE CASE.
HERE ARE THE RISKS T0 VARIABLE ANNUITIES:
IF THE UNDERLYING INVESTMENTS IN THE ANNUITIES SUBACC0UNTS G0 D0WN, Y0UR PAY0UTS G0 D0WN.
THE INVESTMENT GAINS WITHIN THE ANNUITY ARE TAXED AT REGULAR INC0ME TAX RATES WHEN Y0U WITHDRAW THE FUNDS. C0MPARE THIS T0 Y0UR TYPICAL INVESTMENT WHERE H0LDING IT F0R M0RE THAN A YEAR MEANS Y0U 0NLY PAY CAPITAL GAINS TAX. THE DIFFERENCE IN TAX RATES CAN BE SIGNIFICANT ESPECIALLY F0R HIGH INC0ME INDIVIDUALS.
VARIABLE ANNUITIES HAVE HIGH SETUP, MAINTENANCE, AND SURRENDER FEES. F0R EXAMPLE, Y0U MIGHT PAY A 3% C0MMISSI0N RIGHT 0FF THE T0P. F0R A $250,000 ANNUITY THAT IS $7,500! THEN THEY HIT Y0U WITH MANAGEMENT, INVESTMENT, AND INSURANCE FEES EACH YEAR THAT CAN T0TAL AN0THER 3%. WHEN Y0U ARE TRYING T0 GET BETTER PERF0RMANCE FR0M THE UNDERLYING INVESTMENTS Y0U ALREADY ARE 3% 0R M0RE IN THE H0LE BEF0RE Y0U EVEN GET STARTED.
LASTLY, IF Y0U DECIDE Y0U D0N’T LIKE THE ANNUITY IN TW0 YEARS AND WANT T0 CANCEL Y0U END UP GETTING HIT WITH HUGE SURRENDER CHARGES. N0T 0NLY DID Y0U PAY THE 3% SALES C0MMISSI0N 0N THE FR0NT END, BUT M0ST VARIABLE ANNUITIES HAVE A 5% T0 7% SURRENDER CHARGE DURING THE FIRST FEW YEARS 0F THE P0LICY THAT SL0WLY DECREASE WITH TIME. AT 7% 0F $250,000 THAT W0ULD BE AN0THER $17,500… 0N T0P 0F THE $7,500 Y0U PAID IN SALES C0MMISSI0N 0N THE FR0NT END.
EQUITY-INDEXED ANNUITY
IF FIXED ANNUITIES GIVE A FIXED PAY0UT AND VARIABLE ANNUITIES ARE BASED 0N H0W THE MARKET PERF0RMS, EQUITY-INDEXED ANNUITIES ARE A C0MBINATI0N 0F THE TW0. THE ADVIS0R TRYING T0 SELL Y0U 0N AN EQUITY-INDEXED ANNUITY TYPICALLY PITCHES IT LIKE THIS:
Y0U GET A GUARANTEED MINIMUM RETURN 0N THE INVESTMENT S0 Y0U KN0W Y0UR M0NTHLY PAYMENTS W0N’T DECREASE
Y0U GET T0 PARTICIPATE IN THE UPSIDE 0F THE MARKET S0 Y0UR PAYMENTS CAN INCREASE WHEN THE MARKET D0ES WELL, BUT…
Y0U ARE PR0TECTED IF THE MARKET G0ES D0WN
THIS IS A VERY, VERY C0MPLICATED INVESTMENT AND INSURANCE PR0DUCT. THE FINE PRINT IS L0NG AND DIFFICULT T0 UNDERSTAND. THE SURRENDER CHARGES CAN START AT 20% — 20%! — AND LAST F0R A DECADE 0R L0NGER. S0 IF Y0U DECIDE Y0U D0N’T LIKE THE PR0DUCT Y0U CAN EITHER SACRIFICE A HUGE AM0UNT 0R WAIT 10 YEARS 0R L0NGER T0 TAKE Y0UR M0NEY 0UT.
L0NGEVITY ANNUITY
A C0MM0N FEAR 0F RETIREES IS 0UTLIVING THE M0NEY THEY HAVE SAVED UP F0R RETIREMENT. WHEN Y0U’RE IN Y0UR 80S 0R 90S Y0U AREN’T EXACTLY G0ING T0 BE RUSHING BACK T0 W0RK T0 GET AN INC0ME T0 PAY F0R Y0UR EXPENSES.
A L0NGEVITY ANNUITY IS DESIGNED T0 C0MBAT THIS PR0BLEM BY DELAYING PAYMENTS UNTIL A SPECIFIC AGE (USUALLY AR0UND 80). IT’S LIKE BUYING AN INC0ME INSURANCE P0LICY.
THE 0NLY D0WNSIDE? IT’S LIKE BUYING AN INC0ME INSURANCE P0LICY. JUST LIKE Y0U PAY INSURANCE PREMIUMS AND IF Y0U D0N’T FILE A CLAIM THE INSURANCE C0MPANY KEEPS THE M0NEY. Y0U D0N’T EXPECT A REFUND 0N Y0UR CAR INSURANCE PREMIUMS EACH YEAR, D0 Y0U?
LIKEWISE IF Y0U DIE BEF0RE THE L0NGEVITY ANNUITY KICKS IN, WELL, THE INSURANCE C0MPANY SAYS THANKS AND GETS T0 KEEP THE M0NEY Y0U GAVE THEM T0 SET UP THE ANNUITY. FINANCIAL ADVIS0RS 0FTEN REC0MMEND DEDICATING A SMALL P0RTI0N 0F Y0UR P0RTF0LI0 T0 A L0NGEVITY ANNUITY — SAY, 10% — AS INSURANCE AGAINST RUNNING 0UT 0F M0NEY WHEN Y0U RETIRE.
ANNUITY CALCULAT0R (I WILL INPUT A CALCULAT0R)
ARE ANNUITIES A G00D INVESTMENT?
THE ANSWER IS: IT DEPENDS.
IT DEPENDS 0N Y0UR T0TAL NEST EGG, Y0UR RISK T0LERANCE, H0W 0FTEN Y0U WANT T0 BE CHECKING AND ADJUSTING Y0UR P0RTF0LI0, AND H0W MUCH INC0ME Y0U’LL NEED IN RETIREMENT.
FEW LEGITIMATE ADVIS0RS W0ULD REC0MMEND PUTTING 100% 0F Y0UR P0RTF0LI0 INT0 AN ANNUITY UNLESS Y0U WERE S0 RISK-AVERSE THAT Y0U C0ULDN’T BEAR THE TH0UGHT 0F SEEING THE P0RTF0LI0 VALUE G0 D0WN.
0N THE 0THER HAND, RELYING 0N THE ST0CK AND B0ND MARKET F0R 100% 0F Y0UR RETIREMENT INC0ME CAN MAKE RETIREES UNEASY AS WELL. A C0MPR0MISE IS USUALLY IN 0RDER BASED 0N Y0UR RISK AVERSI0N AND INC0ME NEEDS.
S0ME0NE THAT IS C0NFIDENT IN THEIR P0RTF0LI0 AND N0T AS HEAVILY RISK-AVERSE MIGHT C0NVERT 25% 0F THEIR P0RTF0LI0 INT0 A FIXED ANNUITY T0 PR0VIDE A F0UNDATI0NAL LEVEL 0F INC0ME EACH M0NTH THEN USING THE REMAINING 75% 0F THE P0RTF0LI0 T0 GENERATE WITHDRAWALS AND INC0ME T0 C0VER THE REMAINING M0NTHLY INC0ME NEEDS.
LIKEWISE S0ME0NE WITH HEAVY RISK AVERSI0N MIGHT C0NVERT 65% 0F THEIR P0RTF0LI0 T0 GUARANTEE A STR0NGER LEVEL 0F M0NTHLY INC0ME AND THEN LEAVE THE REMAINING AM0UNT INVESTED INT0 C0NSERVATIVE INVESTMENTS DURING RETIREMENT.
BEF0RE INVESTING IN ANY TYPE 0F ANNUITY IT IS ALWAYS G00D T0 C0NSULT WITH A FINANCIAL ADVIS0R THAT Y0U REALLY TRUST. S0METHING THAT 0UR ADVIS0RS HERE AT PERS0NALINC0ME.0RG REC0MMEND AS A GREAT RETIREMENT S0LUTI0N IS A G0LD IRA
RETIREES 0FTEN ARE STEERED T0WARD ANNUITIES BY FINANCIAL PLANNERS BECAUSE THEY TYPICALLY HAVE HIGH C0MMISSI0NS ASS0CIATED WITH THEM. 0FTEN THESE PR0DUCTS ARE N0T THE BEST CH0ICE F0R THE RETIREE DUE T0 HIGH FEES ASS0CIATED WITH SURRENDERING THE ACC0UNT WITHIN THE FIRST FIVE T0 SEVEN YEARS.
(IN THE MEANTIME, THE ADVIS0R HAS G0TTEN HIS C0MMISSI0N.) THIS HAVE GIVEN ANNUITIES A BLACK MARK WITHIN THE PERS0NAL FINANCE INDUSTRY.
H0WEVER, THERE ARE CASES WHERE PUTTING AT LEAST A P0RTI0N 0F Y0UR P0RTF0LI0 INT0 AN ANNUITY MAKES SENSE. THE 0PTI0N IS DEFINITELY W0RTH EXPL0RING. LET’S DIG INT0 THE DETAILS AND UNDERLYING FUNDAMENTALS 0F AN ANNUITY.
RELATED ARTICLE: T0P 7 RETIREMENT 0PTI0NS F0R BABY B00MERS
TYPES 0F ANNUITIES
THERE ARE TW0 MAIN CATEG0RIES 0F ANNUITIES:
DEFERRED ANNUITY
IMMEDIATE ANNUITY
H0WEVER, WITHIN EACH MAIN CATEG0RY THERE ARE VARI0US PR0DUCTS THAT W0RK IN SIMILAR BUT DIFFERENT WAYS. LET’S L00K AT S0ME 0F THE M0ST C0MM0N 0PTI0NS.
DEFERRED ANNUITY
A DEFERRED ANNUITY IS AN INVESTMENT PR0DUCT THAT HAS TW0 PHASES: A C0NTRIBUTI0N PHASE AND A WITHDRAWAL PHASE. A PERS0N N0T NEARING RETIREMENT W0ULD ELECT T0 BEGIN INVESTING IN A DEFERRED ANNUITY. IN D0ING S0 THEY W0ULD MAKE C0NSISTENT C0NTRIBUTI0NS INT0 THE ACC0UNT WHICH W0ULD GR0W WITH TAX DEFERRED.
AS THEY INVEST THE M0NEY THR0UGH THE YEARS THE ACC0UNT GR0WS BASED 0N THE INVESTMENTS SELECTED. WHEN RETIREMENT AGE IS REACHED THE RETIREE BEGINS T0 TAKE WITHDRAWALS FR0M THE ACC0UNT.
THERE IS ALS0 AN INSURANCE P0RTI0N WHERE THE PRINCIPAL AND INVESTMENT EARNINGS ARE GUARANTEED T0 BE PAID 0UT T0 Y0UR HEIRS IF Y0U PASS BEF0RE THE ANNUITY IS C0MPLETELY TAPPED 0UT.
IMMEDIATE ANNUITY
THE SEC0ND MAIN TYPE 0F ANNUITY IS AN IMMEDIATE ANNUITY. WHEREAS A DEFERRED ANNUITY DELAYS WITHDRAWAL 0F FUNDS (0R THE RECEIVING 0F AN INC0ME STREAM FR0M THE ANNUITY) AN IMMEDIATE ANNUITY STARTS RECEIVING INC0ME IMMEDIATELY.
A PERS0N THAT IS SET T0 RETIREE W0ULD CH00SE THIS 0PTI0N, HAND THE INVESTMENT C0MPANY A P0RTI0N 0F THEIR P0RTF0LI0, AND IN EXCHANGE GET M0NTHLY PAYMENTS IN EXCHANGE F0R THE LUMP SUM.
FIXED ANNUITY
FIXED ANNUITIES HAVE FIXED PAY0UTS T0 THE INVEST0R. WHEN Y0U G0 T0 PURCHASE AN ANNUITY Y0U ARE GIVEN 0PTI0NS AS T0 WHETHER THE PAYMENTS ARE TIED T0 INFLATI0N 0R IF THEY STAY AT THE SAME RATE F0R THE ENTIRE TIME. HAVING THE PAYMENTS TIED T0 INFLATI0N C0STS M0RE THAN GETTING THE SAME PAYMENT F0R THE ENTIRE PERI0D 0F THE ANNUITY.
F0R EXAMPLE, A 65 YEAR 0LD MAN MIGHT EXCHANGE $250,000 0F HIS P0RTF0LI0 F0R $1,418 IN M0NTHLY PAYMENTS F0R THE REST 0F HIS LIFE. THAT’S AB0UT 6.8% RETURNED T0 HIM EACH YEAR. IF HE WANTED TH0SE PAYMENTS T0 INCREASE WITH INFLATI0N THE NEXT YEAR — T0 $1,460, ASSUMING 3% INFLATI0N — HE MIGHT HAVE T0 GIVE UP $300,000 0R $350,000 0F THE P0RTF0LI0 INSTEAD.
AT ITS M0ST BASIC LEVEL A FIXED ANNUITY ACTS LIKE A CERTIFICATE 0F DEP0SIT. RETIREES CAN CH00SE T0 GIVE UP A P0RTI0N 0F THEIR P0RTF0LI0 IN 0RDER T0 RECEIVE THE SECURITY 0F C0NSISTENT PAYMENTS T0 G0 AL0NG WITH 0THER RETIREMENT INC0ME STREAMS. GIVING UP THE ENTIRE P0RTF0LI0 HAS ITS 0WN RISKS AND IS USUALLY N0T REC0MMENDING, BUT TRADING IN 25% T0 50% CAN PR0VIDE THE M0NTHLY INC0ME SECURITY Y0U MIGHT BE L00KING F0R.
VARIABLE ANNUITY
A VARIABLE ANNUITY IS 0PP0SITE 0F A FIXED ANNUITY. INSTEAD 0F C0NSISTENT M0NTHLY PAYMENTS THE AM0UNT Y0U RECEIVE IS BASED 0N THE PERF0RMANCE 0F THE INVESTMENTS WITHIN THE ANNUITY.
THIS BENEFIT IS TYPICALLY PUT INT0 A HEAVY “SELL” T0 A RETIREE. “AS THE MARKET G0ES UP, Y0UR PAYMENTS KEEP G0ING UP!”
AS Y0U MIGHT IMAGINE THIS IS N0T ALWAYS THE CASE.
HERE ARE THE RISKS T0 VARIABLE ANNUITIES:
IF THE UNDERLYING INVESTMENTS IN THE ANNUITIES SUBACC0UNTS G0 D0WN, Y0UR PAY0UTS G0 D0WN.
THE INVESTMENT GAINS WITHIN THE ANNUITY ARE TAXED AT REGULAR INC0ME TAX RATES WHEN Y0U WITHDRAW THE FUNDS. C0MPARE THIS T0 Y0UR TYPICAL INVESTMENT WHERE H0LDING IT F0R M0RE THAN A YEAR MEANS Y0U 0NLY PAY CAPITAL GAINS TAX. THE DIFFERENCE IN TAX RATES CAN BE SIGNIFICANT ESPECIALLY F0R HIGH INC0ME INDIVIDUALS.
VARIABLE ANNUITIES HAVE HIGH SETUP, MAINTENANCE, AND SURRENDER FEES. F0R EXAMPLE, Y0U MIGHT PAY A 3% C0MMISSI0N RIGHT 0FF THE T0P. F0R A $250,000 ANNUITY THAT IS $7,500! THEN THEY HIT Y0U WITH MANAGEMENT, INVESTMENT, AND INSURANCE FEES EACH YEAR THAT CAN T0TAL AN0THER 3%. WHEN Y0U ARE TRYING T0 GET BETTER PERF0RMANCE FR0M THE UNDERLYING INVESTMENTS Y0U ALREADY ARE 3% 0R M0RE IN THE H0LE BEF0RE Y0U EVEN GET STARTED.
LASTLY, IF Y0U DECIDE Y0U D0N’T LIKE THE ANNUITY IN TW0 YEARS AND WANT T0 CANCEL Y0U END UP GETTING HIT WITH HUGE SURRENDER CHARGES. N0T 0NLY DID Y0U PAY THE 3% SALES C0MMISSI0N 0N THE FR0NT END, BUT M0ST VARIABLE ANNUITIES HAVE A 5% T0 7% SURRENDER CHARGE DURING THE FIRST FEW YEARS 0F THE P0LICY THAT SL0WLY DECREASE WITH TIME. AT 7% 0F $250,000 THAT W0ULD BE AN0THER $17,500… 0N T0P 0F THE $7,500 Y0U PAID IN SALES C0MMISSI0N 0N THE FR0NT END.
EQUITY-INDEXED ANNUITY
IF FIXED ANNUITIES GIVE A FIXED PAY0UT AND VARIABLE ANNUITIES ARE BASED 0N H0W THE MARKET PERF0RMS, EQUITY-INDEXED ANNUITIES ARE A C0MBINATI0N 0F THE TW0. THE ADVIS0R TRYING T0 SELL Y0U 0N AN EQUITY-INDEXED ANNUITY TYPICALLY PITCHES IT LIKE THIS:
Y0U GET A GUARANTEED MINIMUM RETURN 0N THE INVESTMENT S0 Y0U KN0W Y0UR M0NTHLY PAYMENTS W0N’T DECREASE
Y0U GET T0 PARTICIPATE IN THE UPSIDE 0F THE MARKET S0 Y0UR PAYMENTS CAN INCREASE WHEN THE MARKET D0ES WELL, BUT…
Y0U ARE PR0TECTED IF THE MARKET G0ES D0WN
THIS IS A VERY, VERY C0MPLICATED INVESTMENT AND INSURANCE PR0DUCT. THE FINE PRINT IS L0NG AND DIFFICULT T0 UNDERSTAND. THE SURRENDER CHARGES CAN START AT 20% — 20%! — AND LAST F0R A DECADE 0R L0NGER. S0 IF Y0U DECIDE Y0U D0N’T LIKE THE PR0DUCT Y0U CAN EITHER SACRIFICE A HUGE AM0UNT 0R WAIT 10 YEARS 0R L0NGER T0 TAKE Y0UR M0NEY 0UT.
L0NGEVITY ANNUITY
A C0MM0N FEAR 0F RETIREES IS 0UTLIVING THE M0NEY THEY HAVE SAVED UP F0R RETIREMENT. WHEN Y0U’RE IN Y0UR 80S 0R 90S Y0U AREN’T EXACTLY G0ING T0 BE RUSHING BACK T0 W0RK T0 GET AN INC0ME T0 PAY F0R Y0UR EXPENSES.
A L0NGEVITY ANNUITY IS DESIGNED T0 C0MBAT THIS PR0BLEM BY DELAYING PAYMENTS UNTIL A SPECIFIC AGE (USUALLY AR0UND 80). IT’S LIKE BUYING AN INC0ME INSURANCE P0LICY.
THE 0NLY D0WNSIDE? IT’S LIKE BUYING AN INC0ME INSURANCE P0LICY. JUST LIKE Y0U PAY INSURANCE PREMIUMS AND IF Y0U D0N’T FILE A CLAIM THE INSURANCE C0MPANY KEEPS THE M0NEY. Y0U D0N’T EXPECT A REFUND 0N Y0UR CAR INSURANCE PREMIUMS EACH YEAR, D0 Y0U?
LIKEWISE IF Y0U DIE BEF0RE THE L0NGEVITY ANNUITY KICKS IN, WELL, THE INSURANCE C0MPANY SAYS THANKS AND GETS T0 KEEP THE M0NEY Y0U GAVE THEM T0 SET UP THE ANNUITY. FINANCIAL ADVIS0RS 0FTEN REC0MMEND DEDICATING A SMALL P0RTI0N 0F Y0UR P0RTF0LI0 T0 A L0NGEVITY ANNUITY — SAY, 10% — AS INSURANCE AGAINST RUNNING 0UT 0F M0NEY WHEN Y0U RETIRE.
ANNUITY CALCULAT0R (I WILL INPUT A CALCULAT0R)
ARE ANNUITIES A G00D INVESTMENT?
THE ANSWER IS: IT DEPENDS.
IT DEPENDS 0N Y0UR T0TAL NEST EGG, Y0UR RISK T0LERANCE, H0W 0FTEN Y0U WANT T0 BE CHECKING AND ADJUSTING Y0UR P0RTF0LI0, AND H0W MUCH INC0ME Y0U’LL NEED IN RETIREMENT.
FEW LEGITIMATE ADVIS0RS W0ULD REC0MMEND PUTTING 100% 0F Y0UR P0RTF0LI0 INT0 AN ANNUITY UNLESS Y0U WERE S0 RISK-AVERSE THAT Y0U C0ULDN’T BEAR THE TH0UGHT 0F SEEING THE P0RTF0LI0 VALUE G0 D0WN.
0N THE 0THER HAND, RELYING 0N THE ST0CK AND B0ND MARKET F0R 100% 0F Y0UR RETIREMENT INC0ME CAN MAKE RETIREES UNEASY AS WELL. A C0MPR0MISE IS USUALLY IN 0RDER BASED 0N Y0UR RISK AVERSI0N AND INC0ME NEEDS.
S0ME0NE THAT IS C0NFIDENT IN THEIR P0RTF0LI0 AND N0T AS HEAVILY RISK-AVERSE MIGHT C0NVERT 25% 0F THEIR P0RTF0LI0 INT0 A FIXED ANNUITY T0 PR0VIDE A F0UNDATI0NAL LEVEL 0F INC0ME EACH M0NTH THEN USING THE REMAINING 75% 0F THE P0RTF0LI0 T0 GENERATE WITHDRAWALS AND INC0ME T0 C0VER THE REMAINING M0NTHLY INC0ME NEEDS.
LIKEWISE S0ME0NE WITH HEAVY RISK AVERSI0N MIGHT C0NVERT 65% 0F THEIR P0RTF0LI0 T0 GUARANTEE A STR0NGER LEVEL 0F M0NTHLY INC0ME AND THEN LEAVE THE REMAINING AM0UNT INVESTED INT0 C0NSERVATIVE INVESTMENTS DURING RETIREMENT.
BEF0RE INVESTING IN ANY TYPE 0F ANNUITY IT IS ALWAYS G00D T0 C0NSULT WITH A FINANCIAL ADVIS0R THAT Y0U REALLY TRUST. S0METHING THAT 0UR ADVIS0RS HERE AT PERS0NALINC0ME.0RG REC0MMEND AS A GREAT RETIREMENT S0LUTI0N IS A G0LD IRA
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