Annuities are no doubt an asset to your investment portfolio, but they are often sold poorly or misrepresented which causes fear. This leads people to miss out on the security annuities provide for retirees. Not all annuities are created equal. It is essential that you understand the different types before considering whether or not an annuity is the right product for you. This article will break down the 4 types of annuities available.
A true Fixed Annuity is like a CD but will generally earn you a little more than a CD. The contract guarantees a minimum interest rate. You can’t earn less than the guaranteed interest rate. This is low risk but also low return for an annuity product. The risk lies with the insurance company. There is a 10% penalty to the contract owner if they take out the money before age 59 ½. Unlike a CD, this is a tax deferred product.
Fixed Indexed Annuities
A Fixed Indexed Annuity has a minimum guaranteed interest rate of 0%, sometimes 1%. This means that you could potentially earn nothing, but you also won’t ever lose your principal (unless you are subject to a surrender penalty for withdrawing your money before the period is up). You also have higher earning potential than you would in a true Fixed Annuity with less risk than being in the market. The expectation for earnings in a Fixed Indexed Annuity is between 4% and 7%. Fixed Annuities do have caps on their earning potential. Your advisor should disclose the cap to you before you proceed with the application. This is also a tax deferred product. The risk in a Fixed Indexed Annuity lies with the insurance company.
Famed economist Roger Ibbotson touts Fixed Indexed annuities as a bond replacement.
We personally do not recommend variable annuities for our clients. Variable annuities are higher risk but can equal a high return. They have no guaranteed interest rate. You can lose or earn depending on the market. They also include high internal expenses which means you may break even in earnings, but you might lose money once the expenses are deducted. Variable annuities are also tax deferred products. The annuity purchaser holds the risk in a Variable Annuity product.
Immediate Annuities are annuities that allow you to take a lump sum of money and turn it into an income stream. Deferred annuities (Fixed, Fixed Indexed and Variable) might have an option that allows you to turn the payout into an immediate annuity of sorts, but you might have better payout options through purchasing an immediate annuity product.
Unscrupulous agents have given annuities a bad rap. They advertised unlimited earning potential. They advertised the high earning potential of variable annuities without disclosing the fact that you can lose money and the high internal expense ratios of variable annuities. The truth is the right annuity product can be a key component in your retirement plan. The key is understanding what type of product you are getting into.
Any guarantees mentioned are backed by the financial strength and claims paying ability of the issuing insurance company and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Investment advisory services offered through Virtue Capital Management, LLC (VCM), a registered investment advisor. VCM and BW Wealth Management are independent of each other. Insurance and annuity products are not sold through Virtue Capital Management, LLC (“VCM”). VCM does not endorse any annuity or insurance products nor does it guarantee any annuity or insurance products performance
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