Why Invest in Annuities

When considering any investment, a number of questions should first be posed that address all of the core issues surrounding your individual financial situation, concerns, priorities and your tolerance for risk. Only then can you conduct an honest assessment of an investment in terms of its suitability and its ability to meet your specific needs.

Annuities present investors with a great number of potential benefits, but they are not suited for everyone. Understanding how annuities work is important, but of greater importance is to know how they work in the context of your own situation. Knowing your specific concerns, priorities and purposes is the best way to know why you should invest in annuities.

You Should Invest in Annuities if….

You want to avoid taxes

One of the primary reasons why investors choose annuities is that the tax treatment of earnings is similar to that of qualified retirement plans. There are no taxes due as long as the earnings are left to accumulate inside the annuity. Only after they are withdrawn are they taxed as ordinary income. Investors in the top federal and state tax brackets benefit from the tax savings that mount over a long period of time. The taxes on earnings can be deferred even further if the annuity is converted to income because the earnings will be spread out over the income period and taxed only as they are received. Additionally, because each income payment consists of both principal and earnings, only a portion of the income payment is taxable.

You prefer stability and predictability

Some investors are completely risk adverse and prefer investments with predictable outcomes, even if it means accepting a lower return. Fixed annuities provide competitive rates of return based on fixed yields. Indexed annuities offer the opportunity to achieve returns that are better than fixed yields with no downside risk. Even variable annuities with their separate investment accounts and potential for higher returns can provide some predictability if they offer a minimum rate guarantee option.

With the minimum rate guarantees, annuities can be an effective way to provide more stability to the portfolios of more risk oriented investors. By adding annuities as a safety net to a diversified portfolio of investments, investors will feel more comfortable with some of the risks they assume on other investments.

You can’t sleep at night

The biggest fear confronting pre-retirees today is the possibility of outliving their income. Most Baby Boomers report that their savings are inadequate for generating enough income to maintain a comfortable retirement for their ever expanding life expectancies. As their retirement time horizon shortens their anxiety increases. Fixed annuities are the only investment vehicle that can ensure that your income will last as long as you do. If you want at least a portion of your income guaranteed for life, an annuity can create a foundation of income upon which other sources can be added.

You can’t tolerate any more losses

Most investors who experienced the tumultuous financial markets of the previous decade probably feel the same anxiety over the diminished value of their 401k plans. Many will reach their retirement date with much less than they had anticipated. Worse, some may die prematurely leaving their family with less than they were hoping for to provide them with financial security. During that same time, annuity investors were comforted with the knowledge that their annuities protected their principal with a guaranteed death benefit.

Indexed annuities offer the opportunity to participate in the returns of the stock market without any downside risk. Although the upside returns are capped, generally at rates that greatly exceed the returns of fixed yield investments, indexed annuities will credit a minimum rate if the market’s decline. Even variable annuities provide downside protection if a minimum rate guarantee option is purchased with the contract.

You understand that increased security and predictability comes at a cost

Annuities offer a tremendous amount of financial security and predictability for shell-shocked investors who have endured wide swings in their portfolio values, and now must content with the uncertainty of their income sources. The question usually comes down to how much is that security and peace-of-mind worth and would you be willing to give up some return or pay a little more to get it?

Many people could not tolerate a repeat of the last decade, and fewer people could afford it. Annuities do come with certain costs not found in other investments. There are expenses that cover insurance and administrative costs. With variable annuities, investment management fees, similar to those charged by mutual funds, can increase the cost. Withdrawals from annuities made early on in the contract can result in surrender fees. In addition, the withdrawals could be subject to IRS penalties if they are made prior to age 59 ½.

So, the questions always go back to what is the best investment choice for your particular financial situation and investment temperament. If your temperament has been shaped by some of the conditions listed above, an investment in an annuity may be the right choice for you.