We’re ready to help.
Contact One2One Wealth Strategies today.
You may have heard of annuities – investment contracts in which an individual makes an up-front payment in return for a specified annual or monthly income in the future. Perhaps you saw them pitched by a favorite celebrity in a television commercial, or maybe you were invited to a “free” event akin to those used to market time shares. Sadly, that’s not surprising: Annuities pay hefty commissions to those who sell them.
I’m not a fan; in fact, I’d rather not offer annuities, particularly when there are other solutions that could be better for a client. I earn my living based upon a fee for the advice and planning I provide for my clients, not from product commissions. Plus, in my opinion, there are better options.
Annuities are very complicated products, with enough important variables to make a juggler’s head spin. They often are marketed based upon fear – mostly that the market could drop suddenly, but also that the customer might run out of savings before he or she dies. In addition to regular income, they potentially offer modest investment growth with little or no risk. If that sounds too good to be true, it often is.
There are various types of annuities, but two that I will discuss today:
Fixed-Indexed Annuities (FIAs) – formerly known as equity indexed annuities – offer higher yields based upon stock market performance, with protection against market declines. However, it is common for those yields to be somewhat lower than expected due to the combination of caps on the amount of interest that can be earned and fee-related deductions. The challenge is in understanding how an indexed annuity works, as it is much more complex than a standard, fixed annuity.
Most individuals elect to purchase a guaranteed-income rider with an FIA. This means that the initial investment grows by a predetermined amount every year. There is typically a fee for having an income rider.
The value from the income rider is different from the “contract value” and death benefit. (The contract value, or “cash value,” is the market-based amount the annuity pays if the client dies or decides to cash out, subject to fees and penalties.) The investor can withdraw a certain percentage of the income-rider value monthly or annually once he or she begins making withdrawals. There is a limit to how much one can take out per year without penalty. For fixed Annuities, on the other hand, returns are calculated at a specific percentage every month or year.
But that’s only half the picture with annuities – the first half.
With these products, the account value typically begins decreasing once a client starts receiving payments. There are no guaranteed cost-of-living adjustments; if the recipient needs a bigger check, it likely will involve more penalties and fees.
If you’re seriously considering purchasing an annuity, ask yourself some questions:
When I have a client interested in an annuity, I explain what it truly offers, and we analyze how that would fit into his or her overall financial analysis and income needs. Typically, after I discuss the pros and cons, clients find that annuities won’t offer them the flexibility and growth opportunities they originally thought.
Please just always make sure an annuity fits into your plan and is in your best interest before making the decision to invest in one.
This article was written by Adam B. Carlat, a Glendale-based financial adviser and Chartered Retirement Planning Counselor® with One2One Wealth Strategies. Questions? Call (623) 850-0016 or email Adam@121ws.com.
The opinions expressed in this article are those of Adam Carlat and are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your tax, legal and/or financial services professional regarding your individual situation. The views expressed in this letter are those of the author and may not necessarily reflect those by PlanMember Securities Corporation.
The use of diversification or asset allocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.
Withdrawals from annuities, including partial withdrawals and surrenders, may be taxable. If you take a taxable withdrawal before age 59 ½ you may have to pay a 10% penalty to the IRS in addition to your normal income taxes. Purchasing an annuity with a retirement plan that already offers tax deferral results is no additional tax benefits. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Guarantees and benefits are subject to claims-paying ability of the insurance company. Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation.
Fixed Index Annuities are Insurance Contract and do not directly participate in any stock, bond or equity investments. You are not buying any shares of Stocks, bonds or shares of an index. The Market index value does not include the dividends paid on the underlying market index. These dividends are also not reflected in any indexed interest that may be credited to your contact. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Investors are cautioned to carefully review a fixed index annuity for its features, costs, and risk and how the variables are calculated. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies. There may be a surrender charge imposed during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59 ½ may result in a 10% federal tax penalty, in addition to any ordinary income tax.
Representative registered with and offers only securities and advisory services through PlanMember Securities Corporation (PSEC), a registered broker/dealer, investment adviser and member FINRA/SIPC. 6187 Carpinteria Ave, Carpinteria, CA 93013 • (800) 874-6910. One2One Wealth Strategies and PSEC are independently owned and operated companies. PSEC is not liable for ancillary products or services offered by this representative or One2One Wealth Strategies.