Balancing Your Investment
Risk & Returns
Each of us benefit from having a portion of our assets positioned in a position of safety. To give your plan the optimal opportunity for success, you safe asset return should not weigh down your investment return. Finding that balance is easier when you understand the various options available to you and coordinate it within your overall portfolio.
Types of Annuities
Think of Fixed and Fixed Index Annuities as an alternative to CDs, Bonds, etc. With that said, not all annuities and safe vehicles are created equal.
There Are Several Types of Annuities:
Immediate Annuity
Stream of income payments either for a defined period or lifetime(s).
There are multiple guarantee options from you to choose from, but because the rate of return is so low and it allows you no flexibility, meaning the income is turned on one month after you purchase it, this is now the least popular annuity in our industry.
Fixed Annuity
Typically guarantees your rate of return for a set number of years (3-10 years).
You will typically see the interest rate be a little higher than CD & Bond interest rates, so this provides a good safe alternative. You do lose a little liquidity as most will either allow you access to your interest or 10% liquidity annually during the term period you have chosen to avoid any penalties for early withdrawal. For this reason, it is wise not to commit too much or your liquid assets to this type of annuity.
Fixed Index Annuity
Participates in an index/indices performance each year and credits interest when the index increases in value.
One of the most powerful components is that if the index goes down, you get a 0% credit that year vs. losing value in the market. This means you only see positive changes in your account and over time that becomes significant.
This type of annuity is a good alternative to CD’s and Bonds for your “safe money”. Your credited interest does compound annually and provides you safety. The best pricing usually comes with a 7-year term and allows you to access up to 10% of your account value each year, so you want to be sure you have plenty of liquidity in your other assets.
Fixed Index Annuity w/ Lifetime Income Feature
This annuity is similar to the Fixed Index Annuity in how it earns interest, while still safeguarding your principle and interest earned each year. The big advantage of this annuity is it also provides lifetime income (single or joint) and spreads out the longevity risk for you so that the insurance company can ensure they can guarantee lifetime income payments. This is not to be confused with annuitization of an annuity contract. The Lifetime Income Feature is typically called a Rider or Benefit in the policy.
When you use this annuity, your Account Value will not grow as much as normal, but your Income Value will typically grow MUCH faster and increase the value of your asset substantially when used for the lifetime income.
Why would you want this? Because you are otherwise self-insuring the risk of living too long. We have seen firsthand what many studies have shown. Without this certainty, fear will drive them to live on less income, get too conservative with investment risk, and cut spending during inflationary periods.
But with Lifetime Income guaranteed from a sliver of their assets, we consistently hear from our clients (and many studies have shown this as well) that they are less worried about out living their assets, market performance and inflation impacts. And, they tend to not adjust their income down and instead we see the ability and desire to spend more each year.
Not all carriers charge a fee for the Income Feature, but many do. However, if you are committing your assets to this vehicle for lifetime income, you will see the fee is not a big concern when you factor in the certainties of income you cannot outlive. It is important to understand the features and the cost, so it should be wisely layered into your overall retirement plan to ensure you have made a wise decision.
Variable Annuity
Participates in the market much like a mutual fund and includes several charges that can create a lag on your performance. Typically has the same risk as investing directly in the market.
These can have a variety of features and have become much more complex than they were in their original phase. The varied features usually come with a cost. When you add up the M&E charges, fund charges and feature charges, we see the fees are typically between 2 – 4%. We feel there are far more efficient ways to drill down to your needs and goals vs. a one size fits all approach that many advisors use with this type of annuity. While we do not offer these vehicles, our team can help you understand them.