Many investors and even financial advisors blindly reject annuities as an option. There’s a perception that annuities are a bad deal because they are sold by insurance agents who may receive excessive upfront commissions. Investors may be concerned about losing control over their money or not having enough liquid assets in case of emergency. Also, they may fear getting hit by a bus shortly after signing an annuity contract, in which case the insurance company gets to keep all the money.
It’s not that annuities are bad, it really depends on why you are buying an annuity, and who you buy it from. An annuity isn’t an investment, it’s a promise of income for life. Contrary to what your insurance agent might tell you, annuities aren’t for everyone and can’t solve all your retirement income problems.
But for retirees who want a guaranteed stable income for life, annuities can be part of the solution. An annuity may be a good choice for someone who doesn’t have a traditional pension but would like to create one while avoiding the volatility in the stock market. Pensions were once generous, but few still exist and most don’t increase with inflation. As an alternative, annuities can be purchased for additional retirement income and for inflation protection from expenses such as healthcare costs.
It may make sense to own an annuity as part of your retirement portfolio. If you’re not sure an annuity is right for you, or how much you should place in an annuity, you should seek out the assistance of a fee only advisor. Fee only financial advisors don’t have an incentive to sell you an annuity based on a commission. They also have access to low cost annuities, avoiding the excessively high cost of retail annuities sold by insurance agents.
And what about that annuity you already own? A fee only financial advisor may be able to do a tax free exchange (aka 1035 exchange) into a low cost annuity that will save you thousands of dollars over the life of the annuity.