Headline: Annuities might Insure your savings?

Date: 2/26/2021

Body:  I was continuing with a series of videos, “Getting Your Legal House in Order” and the subject of annuities came up.    Now, the lecturer was herself an experienced elder law attorney, and I am not    That said, I thought that the basics would probably be instructive.  Before you purchase an annuity, please carefully read the contract several times, and it might be sensible to hire an attorney to look over the document

“Annuities have been around for centuries,” says Troy Bender, president and chief executive officer at Asset Retention Insurance Services in Laguna Hills, California. “In Ancient Rome, people would make a single payment in return for annual lifetime payments. Even back then, retirement planning was a concern.”

What Is an Annuity?

Put simply, an annuity is a contractual agreement sold by an insurance company or investment company.  The agreement (generally)  states that you will fund it for a while (accumulation phase) and then at some point, you will begin to receive payments from it (annuitization phase).   Each of these points can be changed and the exact type of annuity could then be changed.  For instance, you might pay a lump sum of $200,000 to buy the annuity, and then on a time schedule (written into the contract) you will begin to receive payments from this $200,000 and the earnings it has thrown off.

Are there different types of annuities?

In a word, yes, there are lots of different kinds of annuities.  There are immediate annuities where you receive payments in the same period that you fund the annuity.  In another type (deferred annuity) you fund the annuity, and then pause for a period (5-10 years or longer is not unusual) and then when the annuitization period starts, you can make much larger withdrawals.  A fixed annuity pays the same amount each period, and a variable annuity pays an amount that is changed based on market conditions.  There are many other flavors of the annuity too.

To make things even more complex, different riders can be added to the contract to add features or modify the particulars of the arrangement.  As an example, an inflation rider will increase earnings gradually, to help mitigate the effect of inflation risk.

Who likes Annuities and what makes them likeable?

  1. Traditionally, annuities are used by retirees to guarantee a dependable  stream of payments that might replace a portion of their paycheck.  The major fear addressed by the annuity is the fear that the elder might outlive their savings.
  2. The earnings on your annuity are tax deferred.  Withdrawal of your own money (if already taxed) is not a taxable event.
  3. If a retiree invests in an annuity, they might be apt to more aggressively invest their other investable assets.  This can be important to enjoying a long retirement.
  4. Per the IRS, you can convert the lesser of 25% of your annuity or $130,000 into a QLAC.   The important point here is that within the QLAC, there are no required minimum distributions until you are 85.

Why might you NOT like annuities?

  1.  Annuities are highly illiquid assets.  This means  that they can be very difficult to sell or have substantial fees associated with the sale.  There are usually surrender fees and these usually decline over time.  Still, this is something to consider carefully before investing.
  2. Please be aware that there is usually not a cost of living adjustment within an  annuity.  So, the $200 you get in month #1 will be nice, but the same $200 in month #130 will not go as far.
  3. Please note that there is market risk involved with this investment.
  4. If it is of importance, the inheritance available to other family members will be decreased as a result of this investment.

Are there things to think about?

  1.  You might want to think about an income rider that ensures a smooth receipt of income payments.   Before you do, carefully consider when you might need this as a source of income AND how much is being charged for the rider.  Remember, the thumb rule is that the simpler the annuity, the lower the fees will be.
  2. The variable annuity can be attractive, to both have a guaranteed stream of income AND to participate in market appreciation.   And, in some cases, they make sense.  But, in most cases, caution is warranted.   Remember, you are going to be investing in a very illiquid asset AND face a large amount of market risk.  Plus, the variable annuity involves fees that you might not think about, like mortality risk charge, administrative fees and the fees charged by the mutual fund company they are using for the market features.  Finally, there are a plethora of fraudsters who stalk the areas of the internet where people might congregate if they are considering this investment.
  3. One way to protect yourself is to immediately write down what you understand the contract to say, and then have the salesperson sign and date the statement.
  4. Be aware that the guarantee associated with the annuity is only as safe as the company offering that product.

The Verdict

Not everybody needs an annuity.  Some have pensions, or other arrangements that make the annuity (and associated fees) much less attractive.   If you decide to invest, please do so thru an investment advisor, who willingly shows you 3-5 options from different companies that offer annuities that are perfect for you.

If you do find yourself involved in an annuity contract that now appears unattractive, be aware that there is often a “free look” period of 10-30 days.  If you decide to not continue within this period, you will receive a full refund.







SPIA: Single Premium Immediate Annuity – Forbes Advisor


Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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