If you are embarking into the annuity world for the first time, it might be like being lost adrift in the movie “Water World.” You are wandering in a sea of never-ending questions. Folks who have been in annuities for years may still not understand them. There are fixed annuities, immediate annuities, variable annuities, and index annuities with caps, all of which are quite complex, especially if you have received your first annual statement and you only made 3%. Annuities have changed immensely from the past. With economic times changing, annuities have evolved from the traditional to become a better dynamic for the overall consumer.
The biggest complaint I often hear when it comes to annuities is the control of your money. It’s frustrating for some that there could be a cap of 3-5% when the market has experienced yields of 20% in some areas. Locking up your money for a 10-year period without being able to withdraw a portion of the money for up to 12 months can be scary. Many people don’t think it’s worth the wait, especially if returns are low. The positive side is that you don’t have to worry about losing your principal due to a market correction.
Let’s start by looking at the control of your money. What if there was a way to purchase an annuity with an optional rider and guarantee that, if you are not happy with the interest credited, there would be options and restrictions that could allow you to walk away with, at minimum, the premium that was put into the annuity? By selecting an additional rider at the time of purchase, the annuities of today can allow you to take withdrawals within the first year, if needed, unlike some traditional annuities. If you don’t make withdrawals in the first year, then in the second year, you can take a higher withdrawal. If you still don’t take any money, then in the third year, you can take an even higher withdrawal.
Now, let’s talk about the caps. I run into people all day long who bought an annuity a few years ago, and now, they are trying to get out of them because they are capped at a low percentage. The problem is that those products may not have the liquidity features that a newer-age annuity has, and they are stuck for a long time, due to the surrender penalty. Potentially, a newer-age annuity can allow for a higher interest credit without risking money in the market. If the market were to pull back, you wouldn’t lose any money. Some of these products offer no cap on the interest credited; for this feature, the company might only take a certain percentage of the gains, known as a spread. For example, if you were to earn 10%, and the spread was 1%, then you actually get to keep 9% of the interest credited.
“If I don’t use it, I don’t want to lose it” is something that many retirees have conveyed to me for years. The new-age annuities today also allow for the capacity, through an additional rider, to have nursing home and home health care provisions alongside the annuity, without having to get a clean bill of health or pay a monthly premium. These riders have evolved and improved, just as the annuities that offer them have. Here is a hypothetical example: If you put $200,000 into an annuity with a long-term care provision and let it sit for 10-20 years, and then you need extra funds for care in your home or at a facility, you could turn on the benefit built into the annuity. Depending on the product, some offer a base of approximately $25,000-$50,000 annually for both your and your spouse’s lives, if elected. Then, you activate the home health or long-term care option up to a $50,000-$80,000 benefit for either of you for five years in a row, as long as there is a continued need, and two activities of daily living (ADLs) can’t be performed. After approximately five years, the benefit will go back down to the base, which could be between $25,000 and $50,000. This could be an effective strategy for those who want to help make sure that other assets are being preserved for the surviving spouse or as a legacy.
Other important considerations when selecting an annuity are growth potential and the option of creating an income for life. The problem with certain older annuities is that they guarantee you a certain dollar amount annually, which isn’t bad; however, what’s bad is that it may stay the same and not adjust for inflation. Many folks forget to plan for inflation, and the people selling annuity products aren’t talking about it. Your purchasing power in 10-20 years will likely be 20-40% percent less. For example, if you purchase an older annuity and it guarantees you $10,000 annually for life, what good is that 10-20 years down the road when your $10,000 is only worth $5,000-$6,000 annually?
Many newer annuities give you more control of your money, the option to add home health care and long-term care rider benefits, higher annual withdrawal benefits, the opportunity to make higher interest credits, and inflation adjustment on your income.
Guarantees apply to certain insurance and annuity products (not securities or variable or investment advisory products), including optional riders and benefits, and are subject to product terms, exclusions, and limitations, the insurer’s claims-paying ability, and the financial strength of the issuing insurance company.
Investment advisory services offered through Zinnia Wealth Advisory, LLC, a Registered Investment Advisor in Florida. Insurance products offered through Zinnia Wealth Management, LLC, FL License #L078655. Zinnia Wealth Advisory, LLC and Zinnia Wealth Management, LLC are separate entities.
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