When evaluating any sort of financial product, the first thing to understand is that financial products are just tools. When tools are used correctly, they can be effective. When tools are used incorrectly, they can be ineffective. When it comes to the conversation about annuities, they often are not talked about correctly.
Let’s say, you’re building something, and you want to put a nail through a two-by-four. If you grab a saw to do that, your conclusion is that the saw is a really bad tool. Well, the saw is not a bad tool. It was just being used incorrectly. It’s not good for hammering nails into boards. A hammer is the better tool for putting a nail in a two-by-four.
That is why it’s important to begin with the end in mind. You start with the goal. Then from the goal, you can begin to work backward to determine what is the best way to accomplish that goal. If you have that in mind, then determining the right product or the right strategy becomes much clearer.
When dealing with any financial product, try not to get religious about determining whether it’s ‘good’ or whether it’s ‘bad.’ That’s probably the wrong question to ask. Instead, try to understand the product, what it does, what it’s good for, and what it’s bad for. Then, armed with that information, you’ll be in a much better position to make the right decision, and find the best tool to accomplish your goal.
Let’s take annuities as an example. An annuity is a popular long-term savings vehicle and there are a few different types.
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 low investment minimums.
Fixed annuities are tax-deferred, so they won’t be taxed as income until you start receiving installments. In the event of your death, if your children are named as the beneficiaries, they can inherit the annuity. Fixed annuities are considered a conservative, reliable way to hold and grow your money.
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’s 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.
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
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.
In general, if you decide to put money into an annuity, you should be okay with leaving it there, untouched for a long time. While most annuities allow a certain amount of withdrawal, you can get hit with some heavy fees if you take money out early. The money you take out will also be taxed.
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.
So, hopefully, that at least gets you off on the right foot in determining if annuities are right for you or not, or frankly any financial product, is right for you or not.
It takes a case-by-case assessment to determine what will be best for your retirement, and it’s worth talking to a certified financial planner.
If you’d like to look at the specifics of your situation, or if you have any additional questions that you’d like answered, let’s have a conversation! Click here to schedule a free consultation.
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.
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