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Discover why people love safer growth of their money and the option for lifetime income

Mike Riedmiller

There is a lot of talk and debate about the pros and cons of annuities and whether they are good to have in your retirement plan. All investments have their strengths and weaknesses.  This, unfortunately, is something you don’t always hear about from people in the financial services industry or the so-called gurus you see in the media.

First, let’s look at the three main types of annuities:

  1. Variable Annuities – Variable annuities usually have higher fees (2% – 4%). Your money is still “at risk” in the market, so it’s subject to market losses. You can add different riders to it, such as an income rider or a death benefit, all of which will increase the fees you’re paying.
  2. Fixed Annuities – Fixed annuities usually pay a fixed rate of return that is higher than the banks will offer and usually have no fees. They can be good as a “CD alternative” for those who are seeking to earn more on their money than if it was in the bank.
  3. Fixed Indexed Annuities (FIAs) – Fixed indexed annuities are what I call a “cousin” to the fixed annuities, since your money is not subject to market losses. In most cases, the fee can vary from 0% – 1.5%. The money in this annuity can increase in value when the “market index” increases. This index can be tied to growth in the stock market, bonds, or a number of other assets. Many of these will increase in value in the years when the stock market is up and will not lose value in the years when the stock market is down.

The reason why many people consider purchasing FIAs is because they are looking to earn more than they can at the bank, but without the risk of losses from the stock market. There are some FIAs that offer safe growth of your money along with access to part of it (usually around 10%) each year. Just think of the benefits of seeing your annuity increase in value each year that the stock market increases while never losing money when the market has a down year.

The money can grow tax-deferred even if it’s not in an IRA or 401(k). Imagine being able to take some of the money that you have in the bank and that’s subject to taxes each year and being able to have this tax advantage. If this money is in an IRA or 401(k), then you would have required minimum distributions (RMDs) in the future, which is true of all money in these types of accounts regardless of where it’s invested. If it’s non-qualified money — meaning it’s not in an IRA or 401(k) — then it could grow tax-deferred for as long as you choose. Always check with your tax professional.

There are other FIAs that offer a lifetime income option that can set you up for your lifetime — and for the lifetime of your spouse if you are married. For example, a 60-year-old could get paid monthly for the rest of their life even if they lived another 30-40 years. This can provide a lot of added peace of mind and security by having another income stream in addition to Social Security. Even if you feel you do not need any extra income right now, you can defer the income into the future. With inflation and rising medical costs, many have found this to be an attractive strategy.

If you’re married, the lifetime income can be set up to continue to pay as long as at least you or your spouse is alive, even if one of you lives to age 90 or beyond — which is happening more and more each year. With Social Security, the overall benefits are reduced when one spouse dies, since you go from having two monthly payments to only one. There is a lot of added peace of mind that comes from knowing you and your spouse will have extra income for as long as at least one of you is alive.

Any remaining money in the cash value account of the annuity is usually paid to your beneficiaries, which can include your children, other family members, your church, or charities.  You can change these beneficiaries any time in the future if you choose.

What’s the catch?

“So, what’s the catch?” is something that I’m often asked when it comes to annuities — and especially FIAs. There really is no catch, but you do need to be aware of two things.

1. Your FIA would most likely not grow more than the overall stock market (S&P 500) most years. It’s not designed to. So you would be giving up some of the upside potential. In return for this, you will not lose money in those years when the market is down. Many people find this appealing, given that we saw three consecutive years of losses around 2001 and then an approximate 40% loss in 2008. By giving up some of the upside, there is a “floor”, so your money will not be subject to market losses.

  1. Most annuities are set up on a contract that can vary from 3-16 years, depending on the company and contract you select. Just like a bank CD, the longer-term annuities can offer better returns. Many FIAs offer partial liquidity, so you have access to some of your money while it’s safely growing, with no risk of market loss. Many find this appealing, given that bank CDs usually do not offer any liquidity while paying lower interest rates. When properly structured, there are ways to have access to a good portion of your money over a given period of time.

 Is an annuity right for you?

Only you can decide if an annuity is right for you. Each year there are billions of dollars spent on the purchase of annuities. Americans currently own trillions of dollars’ worth of annuities for the reasons stated in this article. There are some clients I work with who do not have any money in annuities, and there are other clients that choose to have a majority of their money in annuities. It’s certainly not a one-size-fits-all approach.

When you purchase an FIA, you can “lock in” any gains that you have in your current investment accounts. For example, say your investment account has grown from $200,000 to $250,000 over time. This would be a $50,000 gain. Any money that you would decide to put into an annuity would now be protected and not subject to any market losses. So as the market continues to increase, your account would continue to increase in value. When the market suffers a downturn (like we saw in 2001 and 2008), your account would not lose any money.

There are several FIA options which have very low or even NO fees. Just think if you have been paying around 1% in fees (some people may be paying less if they are in a low-cost index fund, and some may be paying more if the money is being professionally managed). If you have a portfolio of $500,000 and are paying 1% annually, then this is $5,000 per year. Over the course of 10 years, this would be $50,000 in fees (assuming no growth on your investments). If you decided to put 50% of your money into an annuity with no fees, you could save $2,500 per year (which would be $25,000 in 10 years) in fees.

“If you fail to plan, then you have planned to fail.” – Benjamin Franklin

This is where proper planning and the benefits of working with a financial professional can come into play. Many clients I work with want to have the appropriate amount of money in the bank for emergencies and liquidity, the appropriate amount invested in the stock market based on their risk tolerance, and the appropriate amount of money in an FIA for safe growth and/or lifetime income. To help determine this, some will use the “Rule of 100.” You simply take the number 100 and subtract your age from it, and this number might be the percentage of money that you have at risk in the stock market (Example: 100-65=35). Taking 100 minus your age of 65 (or whatever age you are) would give you an answer of 35. This rule of thumb might be the amount that you want invested in the stock market, so as you get older this percentage could decrease.

The benefits to avoiding losses cannot be overstated as you get older, since it takes a greater gain to make up for any losses. If you had $100,000, lost 50%, and then gained 50% back, what would your account balance be? Many people will answer that their balance is back to $100,000, but this is incorrect. If you have $100,000 and it goes down by 50%, then you have $50,000. If you gain 50% on this amount, you would only have $75,000. Protecting some of your money from market losses while still growing it can be very beneficial. You don’t want to have all your financial eggs in one basket, so to speak.

There are many long-term benefits to having all your investments working together to accomplish your important financial goals. Having a “mathematically correct solution” for your investments so your money continues to grow, but with less risk and lower fees, can help you achieve more of your important life goals. It’s up to you whether an annuity is part of your plan.

Investment Advisory Services offered through Retirement Wealth Advisors (RWA), a Registered Investment Advisor. Riedmiller Wealth Management and RWA are not affiliated. Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. 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. Fixed insurance and annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors.

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About the Author:

Mike Riedmiller is the President of Riedmiller Wealth Management, an independent financial firm that is free from the product-focused, sales-driven environment that can be prevalent at large financial institutions. He is a fiduciary financial advisor and the best-selling author of the book “The Road To Success.” He is also the creator of the “Smart Money Planning” educational course. Since his firm is independent, he has access to annuities from most of the top-rated insurance companies. He works with clients from all over Nebraska, Iowa, Missouri, Kansas, and the rest of the nation. Mike specializes in retirement planning and is both securities-licensed and licensed for multiple types of insurance, which he feels is important in helping people to have a truly balanced plan based on their needs and goals.

You can discover more about Mike’s annuity strategies by contacting him at mike@riedmillerwealth.com or visiting www.riedmillerwealth.com.

Learn more about his “Smart Money Planning” educational course at  www.SmartMoneyPlanning.com.

 

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