The longer you live, the more money you must have to cover your needs. And a third reason is math, said Michael Finke, professor of wealth management at The American College of Financial Services, at a recent press event about annuities.
That does not include asset management fees. That's based on an average of the top five quotes for the purchase of a so-called single premium immediate annuity, according to Finke. And instead of just 30 years' worth of income with bonds, you would be covered for life with an annuity.
In addition, some financial advisors could have ulterior motives for eschewing the products, said David Lau, founder and CEO of DPL Financial Partners, a provider of commission-free annuities. That's because taking a chunk of money out of a client's portfolio can significantly reduce the advisor's compensation if they're charging based on the total amount of a client's assets. Commissions on many annuities tend to drive up prices, cause poor sales incentives and create bad products, Lau said.
His company is trying to get registered investment advisors to sell commission-free annuities. Jean Statler, executive director at the Alliance for Lifetime Income, said it is possible to pay less over time with a one-time low commission annuity. Admittedly, there are those who have taken advantage of the commission structure. That includes efforts to streamline sales language so that individuals can better understand what they're buying.
Of course, there are reasons why you might not use such products in the current environment. At the moment, the income from an immediate annuity might be low. However, Finke notes that annuity prices are fair compared with the cost of creating an income from other safe investments like CDs or bonds.
At least annuities allow you to spend your savings without the worry of running out. So, how might you investigate further whether an annuity might make sense for you? What should you watch out for? First, reframe your view of annuities. Three, think about the retirement-income goals you are trying to achieve, and the risks you are trying to manage and mitigate. Do you just want a personal pension? Do you want access to your cash and the opportunity for growth, but possibly higher expenses?
Then consider, said Finke, a variable annuity, although their complexity means that you should shop around. Variable annuities have administrative fees, as well as mortality and expense risk fees. Insurance companies charge these, which often run about Investment fees and expense ratios vary depending on how you invest with a variable annuity. These fees are similar to what you would pay if you invested independently in any mutual fund.
Fixed and indexed annuities, on the other hand, are actually fairly cheap. But in an effort to let you customize your contract, companies will often offer additional benefit riders for these. Riders come with an additional fee, but they are completely optional.
Surrender charges are common for both variable and fixed annuities. Insurance companies usually limit withdrawal fees during the early years of your contract. Surrender fees are often high and can also apply for an extended period of time, so beware of these. The stock market will make gains in a good year. That could mean more money for your investments. At the same time, your investments will not grow by the same amount that the stock market grew.
One reason for that difference in growth is annuity fees. With an indexed annuity, the insurance company will invest your money to mirror a specific index fund. You could still make great gains if the index fund performs well, but you could also be missing out on returns. If your goal is to invest in the stock market, then you should consider investing in an index fund on your own.
A robo-advisor will manage your investments with much lower fees than an annuity. Another thing to keep in mind is that you will likely pay lower taxes if you invest on your own. Contributions to a variable annuity are tax-deferred, but any withdrawals you make will be taxed at your regular income tax rate, not the long-term capital gains tax rate.
The capital gains tax rates are lower than the income tax rates in many places. This is a major concern relating to immediate annuities. Some annuities offer no liquidity whatsoever. Find annuities that offer more access to your savings without penalties including getting your money back at any time. Some annuities charge a lot of money. You might have the same or better result for a lot less money.
Find annuities that offer benefits without charging you an additional fee. Annuity owners can receive an early withdrawal penalty from the IRS if they collect income from the annuity too early. My former role was training financial advisors, including for a Fortune Global insurance company. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you.
Table Of Contents. Short Term Annuities. Find annuity plans that range from years in length. Read More.
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