Hi there and thank you for stopping by. Today I’m going to talk about annuities. This is part two of a two-part series of videos on annuities.
My name is Tina Anders and I am the Certified Financial Planner fee only fiduciary for my firm located here in Petaluma, California, Anders wealth management. I serve clientele primarily in Sonoma County and Marin County here in California.
So, annuities. Today I want to talk about some of the risks that you take when you invest in annuities and I’m not here to tell you to not invest in an annuity. I just want you to be informed about what kinds of risks you’re taking by doing so. One of the risks of investing in an annuity is a low rate of return. Okay? Annuities have low rates of return built into them. And over long periods generally will pay out less than a portfolio invested wisely in stocks and bonds. A balanced portfolio of stocks and bonds, which is designed for capital preservation.
Annuities allow for participation in stock market returns. And they have rates of returns which are significantly lower than investing directly in the stock market that the annuities are based on. This is a fundamental feature of the insurance company taking some of the upside of your returns in exchange for them taking on some of your risk by investing in the stock market.
Another risk of investing in annuity are the high costs associated with purchasing an annuity and I did talk about that in video one on annuities. There are four basic types of fees which I did talk about. While a fiduciary and a fee only Certified Financial Planner might have a total annual cost of between one and 2% of the invested balance and that includes mutual fund, company fees. An annuity might have a total annual cost of between 4 and 7% of the investment balance. That can really eat into your returns.
Another risk, lack of liquidity. I spoke very briefly about surrender charges in my first video on annuity. So, annuities don’t let you allow you to easily change investments once you begin the contract. Withdrawal fees, which are surrender charges, which I spoke about are significant and can last more than a decade in some cases.
Another risk of investing in an annuity is you may not get the tax advantages that you think you’re getting. A tax benefit that annuities offer is the ability to avoid taxes while the account is growing. Annuities don’t provide a tax deduction for contributions made to your retirement. Annuity income in retirement from account growth is taxed at ordinary income. So, until you max out your retirement contribution limits, in say IRAs and 401K’s and so forth. You’re probably going to be better off tax wise with an IRA or a 401K, even a Roth IRA. Insurance payouts for annuities in retirement are taxed the same as any other taxable account. With the return of your capital being tax free, that’s what you put into it, you’re just getting back without having to pay taxes again. And the growth that you get on the money that you put towards the contract, any growth, is taxed as ordinary income that can add up.
There’s another risk investing in annuities and that is inflation risk. So, one of the biggest concerns for retirees in retirement is inflation. Retirement income from most annuities isn’t adjusted for inflation. So, what seems like plenty of money at the beginning of your retirement will likely leave you in financial hardship toward your later retire many years unless you have an inflation adjustment writer with your annuity, which will reduce your monthly payment, but protect you against some inflation. And I recommend if you’re going to buy an annuity, you definitely look into that.
Another risk of an investment annuity is single company risk. What this means is all of the risk in an annuity contract is concentrated in one insurance company. So, while regulations make insurance companies less likely to go out of business than other industries, insurance companies can and do go out of business. Think about 2008. If the insurance company you choose goes out of business, your annuity income will likely be greatly reduced or eliminated altogether. So be careful if you do buy an annuity with whom you put your dollars.
So, in some, annuities can be quite helpful in some situations and in many situations. It behooves an investor to hold their assets in a properly allocated diversified wealth preservation portfolio with less costly, predictable strategies for an income stream. That was a mouthful! Worth listening again if you need to.
Thank you so much for stopping by. Again, my name is Tina Anders, Anders wealth management fee only Certified Financial Planner. If you have comments, questions, topics on which you would like me to provide a video please comment below and I will be sure to do my best to help out. Thanks for stopping by again and always I am in your corner