By Jason LaBarge
Managing Partner, Premier Planning Group
Last month, I introduced you to annuities and the benefits they can give to someone in retirement who needs a guaranteed source of income. Annuities, generally speaking, can act like a pension plan for those who were not fortunate enough to be offered one through their employment.
I love using annuities as a tool when creating a retirement plan for my clients since they can be so helpful when paired with another pension and/or your Social Security benefits to create a dependable monthly paycheck in retirement that will cover your monthly budget needs. However, I always advise that you never have all your eggs in just one basket, and the same applies for annuities. Annuities are just one tool to consider when creating your retirement income plan, but if this tool sounds like something you’d like to consider, here are some things to have in mind when you speak to your financial professional about your options.
What to Consider When Looking to Purchase an Annuity
There are two main types of annuities: immediate and deferred.
An immediate annuity or what is known as a SPIA, single premium immediate annuity, is where you give an insurance company a lump sum and they turn around and provide you a monthly payment right away. This will usually continue for the lifetime of you and/or your spouse. Most immediate annuities are annuitized, which means that in exchange for this immediate, regular, guaranteed income, you no longer have access to the money.
Deferred annuities are just what they sound like. In contrast to the immediate annuity, a deferred annuity will wait to pay you an income. Your money continues to grow in the meantime and you can often lock in guaranteed growth. Not all deferred annuities require you to annuitize the money.
There are two sub-categories: fixed and variable.
A fixed annuity pays a fixed rate, much like a CD. There is also a fixed index annuity, which pays a rate of return based upon the movement of some market index, but it also has a guaranteed no-loss provision.
With variable annuities, you have a mutual fund inside of an annuity wrapper where, theoretically, returns are higher than a fixed or a fixed index annuity. You need to remember, though, that you can lose money based on market losses. The insurance companies offering these types of annuities often charge a fee for their guarantee, known as the M&E, or mortality and expense fee, which fixed and fixed index annuities do not charge. Your financial professional should explain all fees to you before purchasing any financial product.
How to Choose the Annuity that is Right for You
If you have decided that an annuity would be a useful tool to have as a part of your retirement plan, you need to decide which annuity product is best for you. Because of the guarantees most annuities provide, you can work backward to determine how much you will need to put into an annuity to give you the payments you require. If you know how long you’re going to defer taking payments, and you know what the interest rate is, you should be able to determine how much you need to allocate into the annuity to provide the monthly payment you need. You can find helpful calculators by Googling “annuity calculator” to give you a rough idea of what you can expect.
In addition to your own research, I recommend you speak to your trusted financial professional to help you determine what is best for your situation after considering your financial needs, life circumstances and retirement goals. They can explain, in understandable terms, what you are agreeing to, how the annuity works, and any related fees you can expect.
Annuities get a bad rap. So many people say they hate annuities, but I have yet to find a client who doesn’t like to know what exactly they can expect each month in income and to have that amount guaranteed for life. That’s why people like the idea of pensions so much. The funny thing is, to provide security and relieve companies of long-term financial obligations, some companies are transferring their pension plans into pension annuities! So, if your employer doesn’t offer a pension plan, don’t despair, you can create your own pension-like income stream by purchasing an annuity that is right for you.
Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review the annuity product for its features, costs, risks and how the variables associated with the benefits reference are calculated.
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Summit Brokerage Services Inc nor any of its representatives may give legal or tax advice.
Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC. The firm is located at 115 West Street, Suite 400, in Annapolis.