Practical Planning segment: What is an Annuity? An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.
I believe annuities are the most misunderstood retirement vehicles and there are many misconceptions about how these work. We cover the most common types of annuities in this episode, as well as the pros and cons of each one.
Some history: In ancient Rome, Roman soldiers were paid annuities as a form of compensation for military service.
Pay attention to where the guarantees are coming from, they are backed by the claims-paying ability of the company. So, make sure you choose a highly rated company
A major source of confusion is that they can be IRA and Non-IRA accounts. Think of IRA as a vehicle that can hold different types of investments or products such as, stocks, bonds, annuities, etc.
Common characteristic of all annuities… the growth is tax deferred. So, in an IRA it’s already tax deferred. But a non-qualified annuity (i.e. let’s say you have some cash lying around, we call this lazy money’) the interest earned or growth is tax deferred.
Modern Day: 3 major types. I titled this the good, bad, and the ugly. That’s probably not fair in recent times. Probably more like, worst, better, best. The 2nd two in my opinion MAY have a place in an overall Retirement Plan. Not the entire plan, but a place for some.
(10:00) Variable Annuities (VA’s): The ‘worst.’ Companies have evolved over the years. Pros:
Not all VA’s are exactly the same; we are starting to see VA’s with low flat fees called fee-based variable annuities, but they still will have underlying fees to be aware of. They are typically sold by brokers and have high commissions (fees) and surrender charges. Additionally, income riders can be very complex.
(17:15) Immediate annuities: The ‘Better.’ They have a purpose and I have seen them be useful for very specific circumstances. They are structured similarly to a classic pension. Pros:
(22:30) Fixed and Fixed index annuities: The ‘Best.’ These make the most sense when you look at specific needs for someone. Fixed annuities are just like they sound: the account value is fixed and typically pay a fixed amount of interest. Like a CD, term, rate. There are typically penalties for early withdrawal and they are tax-deferred.
Good for situations where folks have “Lazy money” lying around and typically offer a higher rate than a bank CD and there are little to no fees.
(26:01) Fixed Index Annuities (FIA’s): Fixed, but the growth is tied to an external index.
Coachable Segment: The best advice is to get educated on the various types. Don’t simply dismiss annuities because you heard they were BAD. Look at them in context of your overall goals and risk tolerance of the WHOLE Plan.
So as most things in life do your research, right! Get help w/ your decision from a professional that is going to lay out both sides PROS and CONS. I tell folks all the time; there is no perfect financial product out there. It does not exist!
Disclaimer: Please do not take specific advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So unless you’re a client I can’t give you advice because I don’t know you. So think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser………….right? that’s just common sense.
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