What is an annuity? Some say it is an income, some say it is a savings instrument and others say it is an investment. The answer, it can be any and all of these.
First, lets define annuity. The Romans awarded annuities to their loyal citizens; we might call it a pension now. When a government employee retires, their pension is called an annuity, because, like the Roman citizen, a periodic income is received, usually for a lifetime. Well, we are not in the Roman days now, and the thing we call an annuity has expanded to mean more than income, it now means stability and protection of principal, avoidance of probate, tax deferral, estate planning, a legacy to children or church or charitable organizations. It means a peace of mind in retirement.
Oh sure, if a high return is your goal, annuities will never return the high percentages of growth found in a Microsoft stock, or a Bitcoin, eBay or Amazon. These stocks can make a person wealthy, but they also carry risk of loss of income and principal. An investor in Microsoft, believing wealth was on the horizon, lost 30% soon after an investment, due to troubles and a slowdown, so investments always carry no guarantees.
Although annuities are purchased by all ages, the average purchaser is in their 50’s to 90’s, because the annuity offers stability with guarantees.
A man of 50 may purchase an annuity to secure the principal of funds recently inherited. A lady of 60 may purchase an annuity to secure a lifetime of income with a legacy to a special needs child. Another person, suffering from a degenerative illness, may purchase an annuity to secure care if and when a long-term care situation is required. The annuity can be structured for many purposes for many people. Did you know when you win millions in a lottery, the income comes from an annuity issued by a life insurance company?
Let’s look at what an annuity is, where do you find yours and what will it do for you?
First, there are basically two kinds of annuities, each has hundreds of subunits:
- VARIABLE ANNUITY:
This article will discuss briefly here, the variable annuity, but not for the remainder of this article, because the variable annuity is an investment with risk of loss and no guarantee of return and usually carries high fees. In my business, this product does not fit our definition of guarantee of principal for our clients.
- THE FIXED ANNUITY:
A fixed annuity is a tax-deferred retirement savings vehicle that provides a fixed asset protection, while offering accumulation and / or guaranteed income for specific or lifetime purposes. Much like a bank CD an annuity earns interest. Unlike a bank, some bank CD’s interest earned is taxable. All Fixed Annuities, the interest earned is tax deferred.
The fixed annuity comes in many forms, depending on the needs of the client:
- Earnings based on the market, without the risk of market loss.
- Multi-Year Guaranteed return, such as 5 years, 7 years or even 10-year fixed rate returns out per=forming bank CD’s.
- Unlike bank CD’s, an interest income can be set up, preserving the full principal.
- Fixed rate generally will change from one year to the next, many times offering a ‘Sign On’ bonus equal to many years of interest growth; up front.
- Flexible Premium annuity, allowing for periodic deposits, mostly used for IRA building.
- Fixed annuity with long term care riders: Unlike a typical long term care insurance that is not available to someone who is already ill, this annuity is a guaranteed issue, set up, with a small fee, to provide a monthly income, then will illness require confinement or even care at home, the income can balloon greatly, providing funds for care, for life.
In summation: Any deposit account, investment or annuity must be tailored to the individual. Not all vehicles for money deposit and gain are for everyone. Few people I have spoken to over these decades have money buried in the back yard, which means, you must put your money somewhere. The decision best for you is stared by your risk assessment. Usually rated as Low Risk, Moderate Risk and High Tolerance for Risk. Certainly, the bank CD offers the comfort of guaranteed principal. Many investments offer a return, but with a cost, and the annuity offered both the guarantee of principal and a reasonable rate of return.
When our firm was being designed, we made a conscious and well thought decision to offer no financial products, no matter how promising, that carried any risk of loss. This decision proved wise during the market crashes we experienced in the 2000’s and even in recent years, not one client lost a penny of principal. We are proud of that fact and will continue offering a guarantee of peace of mind and a good night sleep.