THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 42: Annuity 101
Practical Planning segment: What is an Annuity? An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.
I believe it is the most misunderstood retirement vehicle and there are many misconceptions about how these work. We cover the most common types of annuities in this episode, as well as the pros and cons of each one.
Some history: In ancient Rome, Roman soldiers were paid annuities as a form of compensation for military service.
Pay attention to where the guarantees are coming from, they are backed by the claims-paying ability of the company. So, make sure you choose a highly rated company
A major source of confusion is that they can be IRA and Non-IRA accounts. Think of IRA as a vehicle that can hold different types of investments or products such as, stocks, bonds, annuities, etc.
The common characteristic of all annuities… the growth is tax-deferred. So, in an IRA it’s already tax-deferred. But a non-qualified annuity (i.e. let’s say you have some cash lying around, we call this lazy money’) the interest earned or growth is tax-deferred.
Modern Day: 3 major types. I titled this the good, bad, and the ugly. That’s probably not fair in recent times. Probably more like worst, better, best. The 2nd two in my opinion MAY have a place in an overall Retirement Plan. Not the entire plan, but a place for some.
(10:00) Variable Annuities (VA’s): The ‘worst.’ Companies have evolved over the years. Pros:
- can grow over time
- in the market (can also be a con, because the account value can drop too!)
- Since it’s in the market, it’s not safe
- high fees!!
Not all VA’s are the same; we are starting to see VA’s with low flat fees called fee-based variable annuities, but they still will have underlying fees to be aware of. They are typically sold by brokers and have high commissions (fees) and surrender charges. Additionally, income riders can be very complex.
(17:15) Immediate annuities: The ‘Better.’ They have a purpose and I have seen them be useful for very specific circumstances. They are structured similarly to a classic pension. Pros:
- guaranteed stream of income
- For life only, life w/ period certain, life with joint payout
- Can be used for estate planning or LTC situations
- actuarially sound
- loss of control
(22:30) Fixed and Fixed index annuities: The ‘Best.’ These make the most sense when you look at specific needs for someone. Fixed annuities are just like they sound: the account value is fixed and typically pay a fixed amount of interest. Like a CD, term, rate. There are typically penalties for early withdrawal and they are tax-deferred.
Good for situations where folks have “Lazy money” lying around and typically offer a higher rate than a bank CD and there are little to no fees.
(26:01) Fixed Index Annuities (FIA’s): Fixed, but the growth is tied to an external index.
- Grow based on the performance of an index
- Considered safe from market loss- claims-paying ability
- Gains are credited tax-deferred; cannot be taken away because of a market drop
- Can be used for guaranteed income payments at a later date
- Little to no fees comparted to VA’s
- Lack of Liquidity- for all annuities
- Opportunity cost is the tradeoff for safety
Coachable Segment: The best advice is to get educated on the various types. Don’t simply dismiss annuities because you heard they were BAD. Look at them in the context of your overall goals and risk tolerance of the WHOLE Plan.
So as most things in life do your research, right! Get help w/ your decision from a professional that is going to lay out both sides PROS and CONS. I tell folks all the time; there is no perfect financial product out there. It does not exist!
- Growth, Safety, and Liquidity
- Sounds too good to be true it probably is. They all have pros and cons
Disclaimer: Please do not take specific advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So unless you’re a client I can’t give you advice because I don’t know you. So think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser , and your financial adviser………….right? that’s just common sense.
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“We appreciate you joining us today for this episode of The Fiscal Blueprint.
Remember it’s not about the money but about your life!
Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
“Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”