Historically, annuities have gotten a bad reputation – they carry a misconception of being expensive and hard to understand. But like other financial solutions that are available, it’s important to review annuities in the context of your overall financial plan and what purpose they can serve to help you meet your financial goals. We’ll review some common myths and misconceptions, and how you can assess if annuities may be a fit for your wealth plan.
Let’s start with a basic definition: An annuity is a contract between you and an insurance company in which you make a lump-sum payment or a series of payments; in return, you receive regular disbursements beginning either immediately or in the future.
There are many types of annuities, such as fixed, variable, indexed, immediate, and deferred. A fixed annuity is very stable and earns basic interest, while a variable annuity has underlying investments known as “sub-accounts” that fluctuate with the market. Generally, a variable annuity can be volatile and have stock market exposure through the investment sub-accounts. A deferred annuity earns interest and can provide for future income while an immediate annuity provides income now. An indexed annuity, also known as a fixed-index annuity, can provide growth and income payments at some point in the future.
Some annuities allow for the protection of principal, while a variable annuity involves market risk and the potential for loss. There are two things all annuities have in common:
So why do annuities get such a bad rep? Here are some common myths and misconceptions:
Let’s consider some positives and benefits annuities may provide. Many of the characteristics that give annuities a bad name are the same ones that can make them an attractive and viable option to consider. For example, you can achieve diversification by properly allocating to multiple sub-accounts or index allocations in a variable or indexed annuity respectively. There are a number of riders you can add to the annuity contract that can provide significant benefit to you as the owner and annuitant of a policy.
Are you looking for a lifetime income stream? A tax-deferred growth vehicle that could provide income in the future? A stable rate of return over a shorter time period? Annuities may help you save and defer taxes if you’ve already maxed out other retirement accounts. If you’re retired and want to generate income, a fixed and/or immediate annuity might be a viable option and a relatively safe alternative to bonds. Annuities may also help to protect your legacy and what you want to leave for your beneficiaries. Since an annuity is designed to provide a stable stream of income, you could be withdrawing less money out of your portfolio allowing your investments more time to grow.
An annuity, like any other financial asset, has its place and should serve as a function of your wealth plan. Ultimately, your overall financial objectives and goals will help determine whether an annuity is right for you. In the financial planning process, annuities, like stocks, bonds, life insurance, and trusts can play a critical role. We encourage you to speak with your advisor to learn if and how an annuity may fit into your wealth plan.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the content provided comes from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Please note, an annuity’s guarantee is subject to the claims-paying ability of the issuing insurance company. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any investment product or portfolio and there are no assurances that it will match or outperform any particular benchmark.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.