The confusing, hype-laden manner in which annuities are marketed and sold is one of the main reasons people dismiss them as viable retirement assets. There are tons of annuity products available, and new ones are introduced almost daily.
Each “new and improved” annuity typically has at least one or two unique features to distinguish it from others in the marketplace. These added whistles and bells make it frustrating to compare annuities and select the one best suited to your specific financial goals. If you’re thinking of adding an annuity to your portfolio, you will need to sift through all the hype and sales talk and focus on answering two essential questions: Do I really even need an annuity? And, if so, what kind of annuity should I purchase?
A lot of pre-retirees and retirees realize that they already have at least one annuity to give them lifetime retirement income. This is perhaps the most well-known annuity of all -Social Security. For better or worse, Social Security is the primary source of income for nearly 70% of Americans. However, most people believe that although Social Security adds periodic cost of living adjustments (COLAs), it alone won’t provide enough income to maintain a decent lifestyle in retirement. Seniors’ growing concerns about running out of money are one reason annuities have seen an uptick in interest. An annuity is one way to supplement Social Security and fill in any gaps that could occur if the COLA can’t offset inflation.
Step back from the sales pitch and ask yourself these questions.
Before considering an annuity, or any financial product for that matter, you need to answer the questions: “What exactly do I want my money to do?” And, when do I want that cash to start flowing?” Annuity companies may try to reel you in with beautifully illustrated brochures extolling “potential gains” or case studies intended to persuade you that your annuity “could” perform as well as the stock market. However an annuity is one of those products you add, not because you’re hoping for spectacular gains in the future, but because you want a reliable source of guaranteed income right now.
Annuities are contracts and not speculative investments. If you like the idea of guarantees, you might like having an annuity, especially the kind of annuity that gives you the highest contractually specified guarantees.
Stan Haithcock, a well-known annuity expert, came up with an acronym to help people decide if they need an annuity. He calls it PILL, and it stands for Protection of principle, Income for Life, Long-term care, and Legacy. Stan and other annuity experts say that if you are not concerned about at least one of these, then you probably don’t need an annuity. However, if protecting your initial investment, creating income to last a lifetime, providing for long-term care needs, or leaving a legacy are important to you, then an annuity might be a viable solution.
So, which annuity is best?
As much as annuity marketers would have you believe otherwise, no annuity company offers contracts that are better than what the other companies offer. While you do want to choose an annuity carrier with a solid financial rating and good reputation, buying an annuity is a lot like booking a hotel room. You simply shop around looking for the best deal possible. Finding the “best” annuity; is often a matter of comparing all the high-rated annuity companies to see which one offers the highest contractual guarantee period. There are many websites that allow you to do just that. There are also online calculators that will give you instant quotes on different types of annuities and annuity riders.
The Bottom Line:
Many financial advisors say that annuities indeed have a place in retirement planning. If you are someone who fits the PILL profile, wanting protection of your initial investment, income for life, help with long-term care needs, or to leave money behind for loved ones, an annuity could make sense. If you don’t need any of these things, then you may not need an annuity.
If you decide that an annuity makes sense in your unique situation, partner with a safe money and income professional to help you choose one with the highest contractually guaranteed rates. You’ll also want to ensure the issuing company has a solid reputation and good financials.
Whatever you do, don’t purchase an annuity for “pie-in-the-sky” claims about future gains. Buy one because it is the most appropriate way for you to reach your retirement goals and ensure you won’t run out of money before you die.
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