In today’s fast-paced world and economy we need to be sure of the financial steps we take, after all, it could mean the difference between enjoying retirement without worry, cutting back on your lifestyle, or worse yet, going back to work.
3 Reasons to Annuity or Not to Annuity
- If you are ok with market fluctuations and you truly have a sense of peace that the stock market will never go down again, then you should not put your money in an annuity. You see, annuities (specifically, fixed indexed annuities) play it safe and do not participate in the market’s downside.
- If you are looking for a grand slam return of 20%, 30% or 40% per year, then you should not get an annuity. Yes, I understand that the market doesn’t have those types of returns annually, but it is almost certain you would not see returns like that in fixed indexed annuities. Their returns are more like base hits; they focus on protecting your principal and achieving a modest return, so they can keep you in the game for the long run.
- If you are not at all concerned that you will run out of money in retirement, then you should probably not have an annuity. You see, there are some people out there who have more money than they know what to do with, and they are not worried about running out of money. But if that is not the case for you, then a fixed indexed annuity can provide you that peace of mind you are looking for.
So, if these three reasons are of no concern to you whatsoever, you can stop reading this right now. The rest of you might want to listen up though! Look, it’s no secret that people are living longer and the probability of outliving your money is very real.
Annuities have been given a black eye. Why? Because brokers and their firms know that it is just a matter of time until you are going to do your own research and sift through all the “white noise” that is out there. With research, you can start to see that annuities do make sense after all, and that only means one thing for the broker: loss of commission income. That’s right, I said it! Why else do you think they are fighting tooth and nail and trying with everything in them to steer you away or to stir up fear in you? Think about this one: When the stock market tanked in the early 2000s, and later in 2008, you lost a lot of money, didn’t you? But your broker still made his or her commission because the annual fees never went away, did they? Then, they said to you, “It’s just a paper loss,” and, “You’re in it for the long haul.” You love hearing that, don’t you? Now you’re back on top of the world! Really? Did the broker ever sit down and explain to you that in the last 14 years, inflation and taxes ate up all your gains, and worse yet, left you behind the eight ball.
Does a fixed indexed annuity make sense?
Let’s take a look at why fixed indexed annuities make sense. First, you have to understand the difference between average returns and actual returns. Let’s look at the following example of a $100,000 investment.
- 50% $150,000
- -50% $75,000
- 50% $112,500
- -50% $56,250
- 50% $84,375
Average 5-year return: 10%
- 5% $105,000
- 0% $105,000
- 5% $110,250
- 0% $110,250
- 5% $115,762
Actual 5-year return: 15%
It would appear that investment A would make more money, because when presented with that investment, you would be told that it has a 10% average for five years. So of course, you think, “Wow, 10%! That’s a lot better than what I’m getting in my CDs or any other investment I have now,” but when you do the math, it results in a $15,625 loss. Yes, a 10% average over five years actually yielded a $15,625 loss.
Now, let’s look at investment B. You would think that investment A is a far greater investment, and in looking at it without working through the math, I would agree with you. However, that isn’t the case, is it? How could a measly 5% for only 3 of the 5 years outperform 50% for 3 of the 5 years? The answer lies in the negative years; you see, your investment A took away 50% twice in that 5-year timeframe, while investment B took away nothing. That is why we say, “Zero is my hero.” I think Mark Twain said it best: “I am more interested in the return of my money, than the return on my money.”
Which annuity should you own?
When looking for which annuity makes the most sense, you should do your homework. After all, it is your money, and you should not lose any of it to market conditions, so making the right choice is very important. You’ll want to know what your caps, participation rate, spreads and fees are, if any. So, for the most part, you could have a fixed indexed annuity that protects your principal and gives a modest rate of return. Again, fixed indexed annuities are the go-to product for retirees who want the most certainty for their retirement dollars.
When you are reaching retirement, or even if you have already retired, it would be prudent to seek a retirement income advisor or specialist to advise on the topic of which annuity is right for you.
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