Annuities: The Financial Swiss Army Knife

From politics to religion, it’s no secret that this country is sharply divided on many issues.

Remember when Republican Ronald Reagan was President and Tip O’Neal was the Democratic Leader?

Although the two great men often argued vehemently, their disagreements were never personal. Reason always seemed to prevail, and at the end of the day, they were known to toss back a beer or two together.

Sometimes it seems like those days of civility may be gone forever. Division and misplaced venom rule now. These attitudes are even crossing over into areas of finance.

Stockbrokers and insurance agents are taking shots at each other’s products, without taking the time to review the positives and negatives and whether each product is appropriate for the client at hand.

Is My Financial Planner Wrong?

Dear Medallion,

I am 63 years old and have recently retired. My financial planner advised me to roll over my pension plans to an annuity that will provide me with an income stream and potential growth in my portfolio. However, my stockbroker and some articles I’ve read say that annuities are too expensive and money that is already tax-deferred should not be moved into an annuity.

Is my financial planner wrong to suggest putting my already tax-deferred money into an annuity?

-Dazed and Confused, Gaithersburg, MD

Dear Dazed and Confused,

Annuities are simply a financial tool. Depending on how they are used, they can help or hurt an investor’s financial position.

Whether or not an annuity is right for you will depend on your personal needs and goals, but here’s a brief description on a few different types of annuities to help you gain some insight.

Fixed Annuity

A fixed annuity guarantees your principal and an interest rate. Unlike other interest-bearing products, the fixed annuity usually allows the owner to withdraw the interest without penalty. They also have pretty low investment minimums.

If the market goes down you will have the same interest rate and not lose money from the annuity, but at the same time, if the market goes up, there is no increased benefit.

The fixed annuity ties your money up for a while, but allows you to have a guaranteed cash flow later, although it does depend on the ability of the issuer to pay the claim.

It should be noted that, since the money in the annuity does not adjust with inflation, the guarantee stays the same no matter what (hence it being “fixed”).

Therefore, because of inflation, it’s possible that you will see a net loss, even with the guaranteed interest rate.

Immediate Annuity

With an immediate annuity, you sell your cash to the insurance company in exchange for a guaranteed income for life.

This income stream is often larger than any other annuity payout, but when the annuitant dies, the heirs get little or no benefit.

It is essentially the opposite of a life insurance plan: you pay a set amount at the beginning, and get regular payments until you die. The guarantee is subject to the ability of the issuer to pay the claim, though, as is the case with all annuities and insurance.

This can be used even if you are already retired, since it starts paying off… wait for it… immediately, to ensure that you have money for as long as you need it. However, these may come with high fees.

Equity-Linked Annuity

An equity-linked annuity offers guaranteed minimum returns that are linked to stock market index values, but it is not considered an equity investment. This type of annuity is generally designed for long-term investors, and has long vesting periods. It should be said that these are not alternatives to stock index funds or exchange traded funds, but are rather insurance contracts.

They give you a percentage of the returns in good market years, and guarantee your fixed rate in down years. Potential growth is based on market fluctuation and how the issuing company calculates that fluctuation.

As with any type of annuity, guarantees and payouts are solely contingent on the claims-paying ability of the insurance company and are not insured by any government agency. They also have very high surrender rates if you need to withdraw early, plus a possible 10% tax penalty, which can easily knock down or get rid of any return you had.

One more thing: some equity-indexed annuities put a cap on the return you can get, which puts a maximum on the amount of indexed growth and will vary based on the surrender period. This cap can be reset annually, so it is subject to change.

Deferred Annuity

With a deferred annuity, you can delay collecting your money until you choose to start getting installments or take a lump sum. This way, the saving phase of the annuity can last for as long as you want before you enter the income phase.

With a certain rider, deferred annuities also guarantee that, in the event of your death, the money will be passed on to an heir.

It’s Confusing!

It’s no wonder you’re confused. There are several different factors that can play into annuities, and it’s easy to get things mixed up or to wonder if it’s the right way to go.

An annuity may be a good recommendation for you if you want some sort of guarantee for your investment. If you don’t need a guarantee, it may be warranted to consider some other form of savings investment, as many non-annuity investments have lower expenses in the long run but don’t offer any guarantee.

It should be noted that most, if not all of them have some sort of early withdrawal penalty, or a market value adjustment, which could result in you ending with less money than you started with.

In the long run, annuities can be seen as more conservative options, given their long-term tendencies and their surrender costs, coupled with their guarantees and different options.


The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.

Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.

We strive to exceed client’s expectations – because we have high expectations of ourselves.

post icon in Retirement by Medallion Group Nov 18, 2015