Annuities

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Pros and Cons of Annuities

Annuities, like any product, financial or otherwise, have positive and negative attributes. Timing is a big factor in making the decision to invest in an annuity so let's assume that you are in the market. Meaning of course that you are approaching retirement and looking to protect the money you have and still receive a reasonable rate of return along the way.

The benefits of owning an annuity are easy to understand and make the product a real possibility for almost everyone at some point in life.

The PROS as I see them:

Tax Deferral: Earnings are sheltered from annual taxation just like an IRA. This is one big advantage annuities have over other safe cash alternatives such as CDs or money market funds.

Safety of Capital: Insurance companies are required to keep a certain level of reserves on hand to ensure your money is safe. Some of the best companies in the industry are stronger than ever today, which makes an investment in those companies a very solid bet. In addition, each state has a guaranty fund to back up deposits with insurers. For the most part, that coverage is limited to $100,000 but each state is different so it's best to look in to the laws of your state.

Liquidity: Annuity contracts have a annual free withdrawal provision giving the account holder access to 10-15% of the account value annually without penalty.

Rate of Return: Historically, annuities fall on the conservative side in regard to yield. Consider your alternatives. Today, CDs are posting average yields of 2%(taxable) in comparison to annuities at around 4%(tax deferred). Also, as the markets normalize, look for the yields on annuities to increase along with everything else. In most markets, you'll find annuities to be a safe, consistent alternative to market fluctuations.

Income stream: New York Life and the Wharton Business School collaborated on a study to find the most effective way to maximize retirement income. Fixed annuities that convert to a lifetime stream of income proved to be one of the best ways to do that. Most, if not all annuity contracts can be converted into monthly income (after the first contract year) that will last as long as you do. Of course, immediate annuities work the same way except you can start getting money now.

On the flip side, the trouble with annuities comes from agents pushing the wrong products on the wrong people for all the wrong reasons. Education is essential in recognizing these negative attributes so you can tell if you are getting reasonable advice.

The CONS as I see them:

Short Term Money: Annuities are not the right place to put money if you need all of it back in one lump sum within a year or two. Keep all annuity purchases reserved for funds with a time horizon of five years or more.

Surrender Schedule: There is no upfront sales charge associated with annuity purchases. In exchange for that, the company will impose a surrender charge on you if you take the money out before the contract matures. This is standard but some contracts have surrender schedules that last more than ten years. This will give you fewer options down the road.

Sales Commissions: Someone will make money when you buy an annuity and there is no way to avoid that. I highlight this point because this is where conflicts of interest arise. It is very important to learn as much as you can about annuities so you can recognize a bad annuity when you see one. Many agents let the thought of a big paycheck dictate which products you see and which ones you don't.

Liquidity: Okay, I know what you're thinking. Wasn't liquidity listed as a Pro? Yes it was. This can work for or against you and it goes along the same lines as the point I made with short term money. What will the money be used for? When will you need it? How much will you need? Answer those questions and the rest of the article should give you an idea if liquidity is a pro or a con for you.

That is about as black and white as I can make it. Before you go too far, realize that there are a lot of gray areas. Certain details about your individual financial situation will clear that up and make it very obvious as to whether an annuity is the right choice and which specific product is best. Visit my website for a free copy of The Annuity Report and learn even more about these products and how they can help solidify an optimal retirement plan.

Bryan J. Anderson
Annuity Expert at http://www.AnnuityStraightTalk.com
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