Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are Annuities the Greatest Thing Since Sliced Bread?

Personal_Finance / Pensions & Retirement Jun 11, 2013 - 06:25 PM GMT

By: Don_Miller

Personal_Finance

Well, no, but they do make sense for some investors as part of their portfolio. However, we have to shop wisely and not allow sales agents to push us into the wrong products just to fatten their own wallets. Unfortunately, that makes some folks shy away from something that could help them make their money really last a lifetime… or longer.


After we published both a Money Forever premium issue on annuities and a special report (The Annuity Guide) last November, our team received an outpouring of emails, some sharing happy stories and others with sad tales; but most folks were just thankful for our objectivity and eager for more information.

So I decided to go back to Stan the Annuity Man, who helped us with the issue, for more input. We have no financial arrangement with Stan; he is just a really smart guy with years of experience in the industry, but I guess his name probably gives that away. We appreciate Stan taking the time to make sure we all understand annuities and how to shop smart.

Take it away, Stan…

Use Portion Control with Annuities

By Stan the Annuity Man

Assuming that an annuity is appropriate for you (more on that in a bit), the first question you should ask yourself is: How much should I allocate to any one, specific annuity? A word of advice: "how much" is not a question you want to ask an agent, because most live in a fantasy world of "one size fits all" and "let's put it all in the annuity." Common sense would tell you that, like every other investment, annuities should only be a portion of your portfolio.

As Dennis has mentioned before, if it sounds too good to be true, it is. Annuities are no exception to this rule, and you should own or consider owning an annuity for its contractual guarantees only. Do not let an agent show you hypothetical or projected returns and try to sell you a dream.

I created an easy to remember acronym – "PILL" – that tells you if an annuity might be right for you. In my world, if you don't need to find solutions for the issues below, then you probably don't need an annuity.

  • P is for principal protection
  • I is for income for life
  • L is for legacy
  • L is for long-term care

Notice that growth is not one of the issues an annuity addresses. Even though 75% of all annuities sold annually (over $200 billion worth) are high-fee variable annuities, I am a firm believer that annuities are not growth products. Indexed or hybrid annuities offer such limited growth that it's comical. Load variable annuities offer limited investment choices in most cases, with an average annual fee of over 3%. No load, no fee variable annuities are growing in popularity because of tax-deferred growth, but you have to be able to properly manage the funds yourself… or hire someone to do it for you.

"P" Is for Principal Protection

The majority of annuities I recommend address the risk of outliving your money. No one wants to outlive their money, and annuities are the only product that will pay you regardless of how long you live. Most people I talk to think that if you die early, the insurance company will keep the balance. That is not true, and it is not how you should structure a policy. I always recommend the contract pay for life and leave 100% of any unused money to your listed beneficiaries.

With this lifetime income plan, you have no money at risk, and you are literally making a bet with the insurance carrier that you will live longer than they project you will. If you live to 125, the carrier will have to pay you. If you die early in the contract, all of the money will go to your family, and the insurance company doesn't keep a penny. It's really that simple.

"I" Is for Income for Life

I can give the insurance company the premium, and it will pay me for the rest of my life. Should I die before my monthly payments have exceeded the premium, the balance is returned to my beneficiaries. As Dennis mentioned in The Annuity Guide, in the worst-case scenario you end up lending your money to the insurance company interest-free for the period over which you collect payments. That is the tradeoff for knowing you have income for the rest of your life.

There are two ways to use annuities for lifetime income: You either need income now or income later. Income now is only solved with a single premium immediate annuity. Don't let an agent try to convince you otherwise by recommending a variable annuity or indexed annuity, because they are factually and mathematically incorrect and only thinking about the commission.

Immediate annuities provide the highest contractual payout of all annuities, and can be set up jointly with your spouse. You also can add an annual cost-of-living percentage increase to the policy as well, even though this decreases the initial payout. If your family has a history of longevity, this contractual cost of living increase might be worth considering.

Immediate annuities used within your IRA can provide a lifetime income stream while offsetting your required minimum distributions (RMDs). When used outside of an IRA, an immediate annuity will provide tax advantages because a portion of your income stream will be excluded from taxes. Single premium immediate annuities have no annual fees and pay the lowest commission to the agent. That combination translates into "good for the client."

If you need income later, there are two strategies to consider: longevity annuities; and income riders that are attached to deferred annuities. Longevity annuities are actually deferred immediate annuities with an enhanced payout at the time you declare the income to start. Longevity annuities can be structured exactly like an immediate annuity as described in the paragraphs above.

Income riders provide the same type of income later, but with a little more flexibility. This attached benefit provides a guaranteed percentage of growth during the deferral years that you can use for lifetime income down the road. The key point to remember with an income rider is that you can only use it for income, and you cannot access the money and that high percentage of growth in a lump sum. Agents tend to blur the line with this fact in the hope that you will believe you are receiving yield that just isn't there.

These strategies for income now and income later – in conjunction with your other sources of income – should solve your basic overhead and expense problems. I call this "stacking income." Along with Social Security payments, pension payments (if you are so lucky), dividends, rental income, and/or RMDs, etc., annuities can help fill in the gap right now or down the road.

For example, if your monthly expenses are $7,000 and your current income can only cover $5,000, then you can make up the $2,000 difference for the rest of your life with a single premium immediate annuity. Or you could project rising costs in the future and allocate money to a longevity annuity and have the income start at a specific date down the road. Because these strategies for income now and income later are contractual, you can plan to the penny how much your lifetime income stream will be.

Because interest rates are at historically low levels, you do have to factor this in to any current allocation decision involving annuities. Just like you probably have done with bonds or CDs, consider laddering your annuities – what I call "lifetime income laddering." For example, if you wanted to allocate $500,000 to a lifetime income strategy, it might make sense to buy an immediate annuity in $100,000 increments over a five-year time period. Even if rates don't move, the contractually guaranteed payouts will be higher each year because you will be older and your life expectancy will be shorter. If interest rates rise as you age, you will get even more bang for your buck and a higher payout.

"L" Is for Legacy, and Long-Term Care

The "transfer of risk" aspect of annuities works the same if you're planning for long-term care or to leave legacy gifts to your beneficiaries. Long-term care annuities should only be used as a supplement to – not a replacement for – traditional long-term care policies. Legacy annuities provide protection of principal while guaranteeing an annual growth (5-6%) that can be left to your listed beneficiaries. Remember that annuities should always solve specific problems.

There are a few important questions you need to ask when considering annuities as part of your portfolio:

  • How much risk am I willing to shoulder myself?
  • How much risk do I want to transfer?
  • What specific problem am I trying to solve? Lifetime income? Legacy giving? Long-term care?
  • What is the specific dollar amount that I want contractually guaranteed?

When I worked with Dennis' team on the November issue of Miller's Money Forever and The Annuity Guide, we put together great tools for smart annuity shopping. A prudent buyer will always read the fine print, do the math, and understand exactly what he's buying before he signs on the dotted line.

A good agent will help you run the numbers and understand the exact costs of what you are buying. Don't let any agent push you into a buying something you don't understand. I am a strong believer that an investor is better off with no annuity than with one not specifically tailored to his needs.

As Dennis mentioned earlier, annuities are not the greatest thing since sliced bread, so to speak. They are, however, pure transfer-of-risk contracts. Adding the right annuity to your portfolio can be a good step toward achieving your retirement goals.

Annuities, when allocated properly, can be just that simple.

----

Hi, Dennis here again. Before you start asking for quotes on annuity products, you’ll want to do some homework. As you can see from Stan, you don’t want to enter into an annuity contract without fully understanding why you want an annuity and which might be best for you.

To help you get started we’ve put together an easy-to-read report called Annuities De-Mystified. You’ll find our 8-point checklist to find out if an annuity is even right for you, our 9-point plan showing you what to look for when buying an annuity, and an important overview of the risks associated with annuities all within the pages of this timely, must-read report. Click here for your free copy today.

© 2013 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Casey Research Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in