Talking about Annuities
In this month’s issue, I would like to discuss and put to rest some misplaced judgments about a widely-used financial strategy. I’m talking about annuities. This is not a sales pitch for annuities. This is intended to educate folks about what an annuity is and is not and where it may fit into a well, thought-out portfolio.
A client says to me; “You’re not going to put me in annuities, are you?” I ask the client what he doesn’t like about them. He has no answer. So, let’s discuss. There are three types of annuities; variable, fixed, and immediate. Only variable annuities do not ensure principal. In my 30 years as a financial advisor, I’ve found that most insurance agents and brokers (including banks) over-use this product. What I mean is that they want to “only” use annuities (typically variable annuities) as the sole vehicle to achieve all goals. Sometimes the reason is that’s all they are licensed to sell. In my opinion, that would be absolutely wrong and inappropriate. Folks should have a well-diversified portfolio that has the flexibility to adjust to your changing needs as well as market trends. We believe that fixed annuities may have a place in a portfolio as a component to achieve specific goals.
I know that there are companies and pundits out there trying to steer you away from annuities with scare tactics. The problem is, that in some cases, they are correct. There are some annuities out there that we would never place our clients in. They talk about limited access to your deposits and high fees and the like. It’s like anything else. There is good and bad in every type of product. There is appropriate and inappropriate. We scan hundreds of options before selecting the ones that are viable options. That allows us to be a true fiduciary for our clients.
We feel that most portfolios should consist of three components. 1) Your assets that are liquid are readily available. We call those Demand Accounts. 2) Principal insured accounts. Finally, 3) Managed risk. For this discussion, I’m going to just focus on Principal Insured accounts. This is the category where fixed annuities land.
Fixed Annuities are:
• 100% of principle is protected by insurance company reserves
• Re-insured by State Guarantee Association and Re-insured by National Association of State Guarantee Associations
• All credited interest is yours
• Never loses principle
• No fees (Unless optional riders are added)
• Only financial product designed for lifetime income
• Interest is compounded -Tax-deferred growth
• Designed for long-term accumulation or growth
• Allows for partial liquidity then full liquidity
• Can earn a fixed rate of return
• Can earn returns driven by a market index with NO market risk
Fixed Annuities are not:
• Going to tie up your assets forever.
• Going to keep your remaining assets when you die.
• Going to have high fees
So, you see, they are not scary. They are actually kind of boring. They are a safe, insured, component of a portfolio with little or no fees. But, as I always say, don’t put all of your eggs in one basket, unless you truly love omelets. Till next time…