Understanding Annuities

For better part of the last century, annuities have played an important role in retirement planning. But according to the financial advisers at Safe Harbor Financial Services, the average  person reads ten times more information designed to dampen and  downplay annuities rather than support them. They say it’s no secret that those who talk down these accounts are usually trying to sell some other financial product.

James Byrd says annuities got such a bad reputation for two reasons: they are misunderstood or misrepresented at the time of purchase. Annuities are long term investment vehicles, subject to a surrender period which typically is about seven years, but varies between  carriers. Byrd says money held in an annuity should not be withdrawn for as long as fifteen years, but he says that isn’t always true for every annuity.

It’s when you start needing money for living expenses or a vacation that  the reputation of the annuity comes into play. Annuities carry “surrender charges” which are designed to deter you from using the annuity for future withdrawals instead of long term income. That’s not to say money isn’t available if you need it, it is but it is the lack of understanding of surrender charges that is the direct result for the annuity’s bad reputation.

Usually, annuities have some sort of free withdrawal without causing fees. Byrd says free withdrawals are the reason that most annuity laddering strategies work so well. Most annuities allow you to withdraw 10% of your  original principal once a year with no charges. It’s after the 10% that the  fees and surrender charges come into play.

If you were to invest $100,000 into an annuity, the free withdrawal benefit would allow you to withdraw $10,000 or 10% with no charges. But, if you were to withdraw $40,000 for a down payment on a new house or  car, it’s the additional $30,000 that could be assessed a fee as high as 15% or $4,500! You would be very upset if you didn’t understand the surrender charge schedule in advance.

Byrd says if you take that same $100,000 and instead of taking a 10% free withdrawal, process a full surrender to another carrier, $10,000 would still be free but the other $90,000 would be charged at the 15%, it would cost you $13,500. An independent financial planner can help you understand these charges and how they can impact your long term objective.

If you’re an individual that gravitates towards big names and brand recognition, Byrd says you should be aware, brand visibility doesn’t automatically give you the best rates, benefits, service or product performance. On the contrary  these carriers require proprietary relationships and do not provide objective advice, and can limit the  guidance you receive for key financial decisions. Byrd says you should make sure the financial planner you choose is not limited to his advice or the recommendations he or she can make for you.

Byrd says the opinion of some Brokers is that indexed annuities are often sold inappropriately to seniors, due to the  limited amount of earnings they can receive during strong market performance. But he says nothing can be further from the truth. 

Byrd says indexed annuities were purposely created as a hybrid investment that combines the growth potential of the market with the safety features and benefits of a fixed  annuity. While upswings in the market may be capped at 7 to 12 percent, an investor never has to worry about losing their life savings and often has several options that guarantee minimum interest rates that pay regardless  of market performance. And as far as product suitability goes, according to the National Association of Insurance Commissioners, in 2004 indexed annuities reached sales of $423.3 billion.

There is a big difference between the investor who wants to grow their  portfolio aggressively and the retiree with $150,000 that will likely need every dollar and more to get through their retirement without outliving their savings. The new hybrid annuities are designed to provide long term  security and the piece of mind that your nest egg will not shrink or fade away due to fees and market volatility. It is the long term savings approach that allows annuity carriers to provide higher interest rates, guaranteed security, tax-deferred accumulation, and positive planning benefits for taxes and distributions which makes the annuity an integral part of any investors portfolio.

Byrd says you should remember, risk should never be a substitute for long-term planning and new income generation for those who cannot afford loosing their life  savings. The features, benefits and popularity of hybrid annuities speak  for them selves as a strong product and have cemented its place as a contender among investment advisers. He says you should choose an independent financial planner that can provide you with alternative products to meet your immediate and long term needs and ensure a safe and happy retirement.

Jim offers a free comprehensive financial review