June 06, 2022
Q: A friend told me I shouldn't buy an annuity, that they are too expensive - what are your thoughts?
A: I think like any investment, not every product is right for every person. Annuities often do have a higher cost associated with them than some investment products, but they also have some different features. Understand, annuities are at their core an insurance product, and like any insurance product, there is a cost. The question we need to ask is, “am I willing to pay for the added features.” Just like when you are reviewing your home or auto insurance, do you want certain features, or do you want to self-fund?
We believe that annuities have a bad reputation because the products haven’t been fully explained or understood as to how they fit within someone's financial plan.
As a fee only firm, we don’t receive a commission when we recommend an annuity, and we are thrilled that more and more top insurance companies (Prudential, Nationwide, Allianz, TransAmerica) are offering these products to fee only financial planners now, but there is still an underlying cost, just like mutual funds and exchange-traded-funds have some underlying costs associated with them.
Where we see them most beneficial to clients is when they can give an income stream that is “pension like.” Shifting some of your invested assets to generate an income stream gives some people comfort and allows them to worry less, especially during market corrections. Is there a cost to this? Yes, there is, but if the cost-benefit analysis works for you, then it is a good solution.
If you think about it, isn’t Social Security a type of annuity? How does this play into your plan? You are paying into the system while you work, and it generates an income stream once you get to a certain age. If you take that income stream out of the plan and invest it instead, will the plan be better? Each person's answer will be different because of their personal risk and investment return and when they start drawing on the investment. This is a topic we will explore more this month as well.
It’s important to understand, there are different types of annuities that exist, and each have a separate purpose:
Fixed Annuities
Variable Annuities
Fixed Index Annuities
Immediate Annuities
Contingent Deferred Annuity
Stay tuned over the next few weeks as we will be spending time digging in and explaining each of them more in depth.
Do your friends ask you financial questions?
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.