Hi there and thank you for stopping by today. I am going to talk about annuities in part one of two videos on annuities. My name is Tina Anders. I am the fee only Certified Financial Planner for my firm located here in Petaluma, California, serving primarily clientele in Sonoma, and Marin counties.

And I’m here again to talk to you about part one of two videos on annuities. Excuse me. So, what is an annuity? An annuity is a financial product that pays out a fixed stream of payments to an individual. And these financial products are primarily used as an income stream for retirees.

Annuities are contracts issued by insurance companies which invest dollars from individuals and they help individuals address the risk of outliving their savings, which is a very significant risk. So, while annuities can be beneficial in some specific circumstances, they are less than optimal investments. And most individuals are likely to benefit more from a well diversified portfolio of stocks and bonds in a portfolio that is for capital and wealth preservation.

Despite how they’re often sold, annuities are insurance contracts and not investments. An annuity transfers a portion of the risk of investing from the client to the insurance company and the insurance company charges annual fees, sometimes upwards of 5 to 7% from the account balance in order to take on the investment risk.

So, annuities have four basic fees within the contract.

  1. They have an investment management charge, which is much like what a mutual fund company charges to manage the investments.
  2. They have an administrative charge that covers the insurance company’s operating expenses and profit.
  3. They have a mortality and expense risk charge to pay for the life insurance built into the annuity, as well as other risks to the insurance company.
  4. And finally, they have what’s called a surrender charge, which is a fee to encourage you to keep the annuity contract for a period of time without having to surrender any of your account balance. And the period is usually up to about 10 years. So, this the surrender charge is there to allow the insurance company to make enough money to pay for the salespersons commissions, oftentimes. If you want to pull your money out before the surrender charge period, you will have to give up some of your account balance in order to pull your money out.

So, when does it make sense to own an annuity? Well, if you have maxed out your tax advantaged retirement plans, your Roth IRA, your traditional IRA, your health savings accounts, your 529 College Savings Accounts, your 401k or 403B or other employer sponsored retirement plan, then it may make sense to then take additional funds that you have to invest and put them into an annuity contract so that you have another income stream in retirement.

Another reason it might be good to have an annuity. If you’re dealing with a lot of stress because of the volatility of the market, and I would include the COVID related volatility, then it might be helpful to take a portion of your portfolio and put it in an annuity contract so that you can rely on an income stream down the road, thereby removing some of your stress. Because financial peace of mind is of the utmost importance.

Another reason to own an annuity is if you need to provide for basic living expenses. Now, Social Security is designed to do that but if Social Security isn’t going to be enough, it might behoove you to place a portion of your portfolio in an annuity contract in order to help provide for basic living expenses in retirement.

That is the conclusion of part one on annuities. I will continue with part two of annuities with another video. 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