Annuities are by far the most confusing investment vehicle. This is mostly because there is so much misinformation out there. Mostly because Annuities generate the salesperson commission when they are sold and therefore attract the sleaziest of salespeople. That does not mean that all annuities are bad or all annuities are created equal. I will provide you with my opinion and my experience.
Let’s start with the different types of annuities and a short description of each. I had to rewrite this a few times because even the simplest explanation still seemed too complicated to me. I will cover each annuity in more detail in future blogs. Here we go:
Fixed Annuity – Straight forward, receive a guaranteed rate of interest for a set period. For example…3% for 5 years. That’s it. 3% interest per year for 5 years then you choose to renew at a new rate or take your principal and interest and move on.
Fixed Indexed Annuity – This is the best way to get exposure to some of the gains of the stock market without sacrificing your principal. Instead of taking a guaranteed rate of interest, like the Fixed Annuity, you can potentially earn a higher rate of interest based on the movement of stock market indexes. Such as the SP500. The insurance company assumes any risk and there is no threat to your principal as your money remains safe inside the insurance company’s general account. For example…someone puts $100,000 into a Fixed Indexed Annuity. Their interest is linked to the performance of the SP500. If the SP500 is flat for the next year the interest rate would be 0. If the stock market goes down thirty percent, the interest rate would be zero. If the SP500 is up 10%, you may earn 6%. These annuities are best used as a long-term foundational piece to your retirement plan.
Variable Annuity – One of the worst investment products ever created. These are basically mutual funds with an insurance wrapper. Your money is directly invested in the stock market. You can lose your principal. Variable annuities have high annual fees of 2.5-3.5%. Why invest in the stock market inside a variable annuity at 2.5-3.5% fees when you can get a professionally managed portfolio for 1.5%? There is not a lot about Variable annuities that makes sense. There is a guarantee that someone will at least receive your principal upon your death. There are better guarantees out there than that. I have never used a Variable annuity and can never see a scenario where I would use one.
SPIA - Single Premium Immediate Annuity - Annuitization – One of the oldest forms of annuities next to the Fixed Annuity is a Single Premium Immediate Annuity. This is where you exchange a certain amount of money up front for a guaranteed payout over a certain number of years or over a lifetime or a combination of both. This is also called Annuitization. It can be started immediately, or it can be differed and started in the future. The biggest issue with this is that it is irrevocable. Once you agree to the contract you cannot change anything. If you agreed to deposit $100,000 for payment over 20 years you cannot cancel and receive your $100,000 back or the remaining balance. For this reason, there are very few scenarios where I would suggest using an Immediate Annuity.
Investment Advisory Services offered through Spyrnal Wealth Management, LLC. Insurance products and services are offered through Timothy J. Spyrnal. Snowbird Retirement does not render legal or tax advice. Be sure to consult with a qualified tax and/or legal adviser regarding the best options for your circumstances. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Spyrnal Wealth Management.
The foregoing content reflects the opinion of Snowbird Retirement. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful