Annuities are a type of investment that can provide you with a steady stream of income over time. But are they a good option for you? Here’s what you need to know before making your decision.
What are Annuities?
An annuity is an insurance product that pays you a fixed amount of money each year, based on the terms of the contract. The money is paid out regardless of whether or not you sell the contract beforehand.
Why are Annuities Popular?
Many people choose annuities because they offer stability and income potential. Annuity payments are usually tax-free, so they can be a good option for people who want to save money tax-wise. Additionally, annuities tend to be low-risk investments, so they may be a good choice for people who are worried about their financial security in retirement.
4 Reasons to Purchase an Annuity
Annuity expert Stan Haithcock says that there are only four reasons to purchase an annuity. He came up with a clever acronym to help you remember those reasons in case some shady annuity salesperson stops by your house.
According to Stan Haithcock, you should only buy an annuity if you need to solve one of the following issues.
- P = Principal Protection – Do you want to lose the money you put into a product or would you rather keep it safe?
- I = Income for Life – Do you care if you have a stream of guaranteed income that you can’t outlive, or do you prefer surprises every month?
- L = Legacy – Is leaving your kids something when you die important to you, or do you think it’s better if they pull themselves up by their own bootstraps?
- L = Long Term Care – Do you worry about your money getting eaten up by nursing home costs or are you so amazingly fit and genetically superior that you will never need long term or confinement care?
Did you notice that nowhere on that list was a question that said, “Do you want a red-hot investment vehicle with the potential to rock your portfolio?”
That’s because I agree with Stan, annuities are not investments. At least the types of annuities I most often recommend to my clients are not investments. Nor should they be marketed as such.
For retirees and those about to retire, an annuity has one primary purpose. That purpose is to convert a portion of your idle cash into a contractually-guaranteed, tax-advantaged income stream.
In a previous blog post, I wrote about the old-fashioned “three-legged stool” approach to retirement that is faltering in our unstable economic environment.
As you might recall, the stool’s three legs are personal savings, pension, and Social Security. Devouring those legs to the point of fragility are the money-eating termites of inflation, ineffective qualified plans, taxes, and useless politicians. Having an annuity in the mix can help you slow down the erosion and keep your stool from tipping over.
Evaluate Your Risk of Annuities Before Investing
An annuity is the only contractually-guaranteed way to grow your wealth with less risk than you incur using more speculative vehicles.
As Stan says, you choose an annuity for what it WILL do, not what it MIGHT do. When you invest in other kinds of products, you are willing to assume more risk because the investment MIGHT pay off. There are no guarantees and zero predictability. That makes planning for retirement challenging and stressful.
When you choose the right kind of annuity to meet your goals and objectives, you will get safe, sane returns, and reliable income you can never outlive. I can help you discover more about annuities, life insurance, and other fun and useful products to grow and protect your wealth.
In other words, if you want a non-sleazy, credible, dashing young financial professional on your money dream team, contact me. I will help you design your perfect post-work life and help you clarify your goals, risk tolerance, and attitudes toward money.